BiggerPockets Podcast 287: Putting Together Real Estate Deals Using Creativity Instead of Cash with Shiloh Lundahl

by | BiggerPockets.com

How much money does it take to invest in real estate? Is there really such a thing as “no- or low-money down?” After you hear today’s interview, you’ll know the truth! Today we sit down with Shiloh Lundahl, a real estate investor who specializes in putting together deals using a variety of different no- and low-money strategies in some pretty unique combinations. From utilizing business lines of credit, to bringing in partners, to hard money, to lease options and beyond, this episode will give you tons of ammunition for your own creative finance deals. And don’t miss the incredible strategy that Shiloh uses today to make 300 percent more per deal than if he were to flip the home. It’s pretty darn fantastic!

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This is BiggerPockets podcasts show 287.

You know I did know the numbers very well at the time and I ended up losing about $5,000 on my first deal by myself. Again there’s still that learning curve and so you know just to kind of give a brief overview, 2015. We do three flips. My net profit, mine was about 17,000. It wasn’t a whole lot, but I was learning. Each deal I learned quite a bit from and then in 2016 we do six flips. We buy some rental properties out in Indianapolis and then we also did this one seller finance deal.

You’re listening to a BiggerPockets Radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all of the hype, you’re in the right place. Stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com. Your home for real estate investing online.

Brandon: What is going on everyone this is Brandon Turner today’s host of the BiggerPockets podcast here with my partner in crime, Mr. David Green. How are you doing buddy?

David: I’m doing great I’m actually getting on a plane tonight as soon as we’re done here to fly to Las Vegas.

Brandon: Wow. Ooh.

David: I got invited to speak on a panel of long-distance investors out there at a big conference that were going to be having.

Brandon: That ended way more lame than I thought. I was thinking Vegas and going to go and throw some money away. Panels.

David: No, I put all of my money into real estate. I do not put it into gambling, casinos, roulette none of that.

Brandon: I don’t gamble. I only invest in bitcoin.

David: Yes.

Brandon: Anyway no I don’t invest in bitcoin. Anyway that’s cool. Going to go talk about long-distance investing. What makes you qualified to talk about that Mr. David Green?

David: Well mostly my friendship with you honestly I just like work that to the bone as much as I can get out of it and then I wrote this book called Long-Distance Real Estate Investing and I think that they just saw the title and assumed oh we should bring him. They didn’t see how bad the book was because nobody read it.

Brandon: I believe I read the other day that that book is the number three best-selling book on BiggerPockets. Do you know what the number one is? Want to take a guess?

David: I would imagine it would be the book on rental property investing?

Brandon: Oh man look at that. Always living in my shadow and I actually don’t know what number two is. Right, oh boy.

David: Not only is The Book on Rental Property Investing the best-selling book at BiggerPockets. It’s the best-selling investing book in the world.

Brandon: It often times is and it usually is in Amazon. Weird, but you know it’s not because it’s a good book. It’s probably horrible, but you know. BiggerPockets feels bad about me.

David: Got a good name.

Brandon: They buy my book so anyway thank you guys all who have bought books from BiggerPockets. You guys rock. In fact today we talk a fair bit about books. Our guest today Shiloh Lundahl, supercool guy is incredibly creative with his financing and so we go deep into that.

In fact, one of his like strategies he talks about like this is later on the show, but make sure you guys listen to it. He talks about like this hodgepodge collection of six different strategies he combines together to do his real estate deals. Pretty much with no money out of pocket so he’s using a combination of hard money, lease options, BRRRR, business lines, partnerships, and there was one more in there. I don’t remember what it was, but all wrapped together into like this perfect thing.

Anyway you guys are going to love it, but he talked about that. He talked about business lines of credit. In fact he talks about how he went up to eight—he has $800,000 in business lines of credit that he can fund his deals with. He talks about losing $5,000 bucks on his first flip, which is a really interesting topic. Something that kind of hits home and then he talks about a certain book.

You guys will hear that, a certain book that really helped him heal and that will make a lot more sense as you hear it. Listen up for all of the stuff today you guys are going to love the show. Before we get into that let’s get to today’s Quick Tip.

David: Quick Tip.

Brandon: Alright so you might have got this email are ready if you’re a BiggerPockets member. If you’re not a BiggerPockets’s member what are you doing listening to this show and not being a member. Come on sign up it’s frame. Anyway you might have got the email and found this out, but landlord forms.

We sell on BiggerPockets landlord forms. The actual price of them was like $200 bucks and you get state specific that have been reviewed by attorneys in your state and you get like a ton of forms. Anyway we decided that our pro members are so awesome on BiggerPockets that we’re just going to include landlord forms for all of our pro members. That’s like a $200 value.

They get updated annually and you can use them for your landlording business or your rental property business so definitely check that out. Go to BiggerPockets.com. If you’re not a pro member go to BiggerPockets.com/pro. Sign up today for pro so you can get that cool stuff.

With that, that is our Quick Tip. Before we get to the show though I do want two more quick pieces of the housekeeping. First of all, this week we’re going to be doing a special webinar. I know I probably say they’re all special, but this one is probably one of the if not the most one of the most popular ones I’ve ever done.

I did it a few times last year. It was called the 90 day challenge how to buy your first and the next rental in the next 90 days or less so if you’re interested in kind of trying to hit that 90 day challenge, people of that thing. I get so many so much feedback from people all of the time saying, “Hey I took your 90 day challenge. I bought two properties. Bought three properties.” If you want to know what that is go to BiggerPockets.com/webinar and sign up there and lastly let’s hear a word from today show sponsor.

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Brandon: Alright, well that was a long introduction where I talked to for 99% of it. David anything you want to say before we got on with it. Too bad.

David: No.

Brandon: Let’s get on to the show. Alright yes you guys are going to love this show so grab some paper and pencil because you’re going to want to take some notes. Here we go.

What’s going on Shiloh? Welcome to the BiggerPockets podcast. Good to have you here.

Shiloh: Thank you I’m glad to be here.

Brandon: Yes so let’s jump right into your story. I know very little about it except for that I heard you do lease options which I’m always fascinated by because I’ve done a few of them and I really like them. Did you start with that lease option or how did you begin your real estate investing journey?

Shiloh: We didn’t start with the lease options. Back in 2010, just like a lot of other investors I was reading the book Rich Dad, Poor Dad and I talked with my wife and I said you know I’d like to get a rental and so we found a property, well a house close to our house down in Arizona and we decided we would purchase that property and then we got a family to move in there and so that’s kind of where we started. We just started with one rental back in 2010 and then it wasn’t until years later that we switched over to the lease options.

Brandon: Oh okay so tell me about that very first property. Like what did you pay for it? Do remember? How did you finance it?

Shiloh: I do so we had a lot of equity in our home and so we got a home equity line of credit and then there was a family that we knew of that wanted to move on into our neighborhood and so we showed them this house that was on the MLS. We asked them, “Hey if we bought this house would you want to rent it from us?” They said, “Yes.” We bought the house for $93,000 at the time and this was back when the market was really depressed. It was a five bedroom, three bathroom house.

It was on you know, it had backed up to a golf course. We bought it for $93,000 and then we put about $10,000 into materials to fix it up and then the family that moved in there they actually did the flooring and painted the house and then we gave them a discount on rent for doing that.

Brandon: Pretty cool, pretty cool so you said something quickly there that I think is fantastic and I want to make sure we don’t gloss over it. You used a line of credit from your house to buy that. Can you go into a little more detail because I think that’s a fantastic strategy and something that today especially now that a lot of people have equity could take advantage of. Can you talk about that?

Shiloh: Yes so, but again this was back in 2010 and so they weren’t giving out big lines of credit on homes and so I think our line was maybe between 20 and 40. I don’t really remember. We went to the bank. We had to go through this entire process and was very long, difficult process at the time to get a equity line of credit and then we were able to take about I think it was about $20,000 at that time to put a down payment on the house. That’s how we got it.

Brandon: Yes, that’s great so if you have like a little equity in your house you can get a home equity line of credit. Use that. Not even for the whole purchase like you did for a down payment and essentially do real estate without any money down. Equity I did that once on a triplex. Fantastic so anyway supercool.

David: Okay Shiloh so you bought a rental and it worked out well what was the next move that you made in real estate investing?

Shiloh: Actually I didn’t do anything else with a real estate for the next four years so after getting that rental my wife and I we were listening a lot to Dave Ramsey and so we worked just on getting out of debt and so we worked really hard. We paid off all of our remaining school loans, any credit card debt, anything like that and then in 2014. Let me back up a little bit so I’m a child and family therapist and so I have a practice in Mesa, Arizona and I was practicing out of the building at that time and then the building owner actually passes away.

They are ready about to sell the building and I liked the location and I wanted to remain staying there and so I talked with the selling realtor and I put in an offer and I actually purchased this building that I had my practice out of. We built out the other side and then we added six more offices and so right now I have a building in Mesa, Arizona that has 12 offices that I rent out to other therapist. That’s my next move in real estate was to go into this commercial deal.

Brandon: You’re basically like office hacking.

David: Yes.

Shiloh: Yes.

Brandon: That’s awesome.

Shiloh: Yes I am. It is considered an owner occupied because of all the hallways and all of the other things I do technically have 51 percent of the space I am occupying, we’re using to one degree or another.

Brandon: Nice. Very cool.

David: Did that get you a better loan when you bought the property?

Shiloh: It does. It does get me a better loan when I buy the property.

Brandon: I did not know that.

David: How do you? I’ve always been curious how do you know what you should raise the rents every time a lease expires in a commercial building. Is there a rentometer for commercial stuff that you can check out?

Shiloh: You know that’s a great question. I don’t know exactly. This is the way that I do it so when I was in there, there was I was subleasing from somebody else who had a sublease. Okay so I was subleasing the sublease and so I was paying about $600 a month and then when I purchased the building I kept all of the rents about the same for a year and then I increased them about $50.

Some people left. Other people came in and as other people came in I was steadily increasing the rent. Now I usually have people on two year options. I’m sorry to your leases and then they I usually increase the rent about maybe two or three percent a year.

David: Okay.

Brandon: Did you say you were. I just got to dive into this you were subleasing a sublease and then you bought the property. That does that mean that they were subleasing from you and you were subleasing from them? It was like that perfect circle?

Shiloh: Yes, they were so it was kind of an interesting deal at the time. There were some conflicts between me and the person that owned the sublease and I was kind of nervous as to kind of being booted out as a group and so I bought the building and then my anxiety went way down.

Brandon: That’s the funniest thing like yes anyway that cracks me up. Alright so what came next then after the commercial building. You got the idea, you had the rental that thing is going fine. I’m assuming like you’re learning how to be a landlord. Were you managing it yourself then? Did you have a property manager?

Shiloh: I was yes.

Brandon: Okay.

Shiloh: I was and I still am managing the property.

Brandon: Okay.

Shiloh: The thing that came next is my wife and I at the time you know we had a new baby at the time and so we’re up late and we’re watching HGTV and things like that and we’re seeing these people flip houses and we say hey you know what we should try that. We should go and see if we can do something like that. When I purchased the building this desire to do real estate came back up. You know we had that one rental back in 2010 and then we decided well why don’t we try some more and so I found my Rich Dad, Poor Dad CD again and as I’m listening to that I thought to myself why did I stop doing this?

Why did I stop listening to this? I missed out on like four great years of buying real estate and so after listening to that CD I thought I wonder if there are other like books out there like this. I look up Robert Kiyosake and it turns out he actually has a lot of other books. I don’t know if you guys knew this.

Brandon: He does.

Shiloh: Yes, he has a lot of other books and so I listened to—my next book was Cash Flow Quadrant.

Brandon: Yes.

Shiloh: That book—one of my favorite books had changed my life.

Brandon: Yes, I okay the first time I read Cash Flow Quadrant I didn’t get it. Like I didn’t get into it. It was fine. I was like okay whatever and that was when I was like 21. Then I reread it a couple of years ago and I was like this is the best book I have ever read. Like and I realize that that book subtly influenced everything I have done since then but I didn’t know it at the time. Like I wasn’t ready for the truth of Cash Flow Quadrant of the time. Anyway.

Shiloh: Well and to go even deeper than that that book was actually very healing for me.

Brandon: How so.

Shiloh: That sounds kind of weird because you know it’s just a book about you know how people earn money. Well what happened was I am not a really great employee. When I would get jobs I would oftentimes in the job think you know what I know that my boss wants me to do it this way, but this other way is more effective. Why don’t I just do it this other way?

I would go and do it the way that I thought was effective and my bosses didn’t like my creativity or my thought process and so I would tend to get in trouble doing it that way. When I read Cash Flow Quadrant and I realized that there’s a different mindset from an employee, from a self-employed individual on a big business owner and an investor I realized everybody in my family, my parents, my aunts, uncles, my grandparents. Everybody in my family owns their own business.

They’re all entrepreneurs and so I grew up with the mindset of a small business owner and so when I went into the field of being an employee I didn’t do very well and then as soon as I switched over to owning my own business, my own therapy practice I started to do very very well. It helped to me release all of these feelings of shame that there was something wrong with me because I am getting all of this negative feedback from my employers. It just turned out the way that I thought was differently than an employee and so it released all of these feelings that had of shame that I was that there was something wrong with me.

Brandon: That’s fascinating. I’m thinking back to my own life now. Like my mom always had her own business. The daycare in our house, but like she was an entrepreneur in that way and my dad he worked a job, but he was every week he had a new idea.

Like I’m going to get a food truck and start selling you know barbecue beef to whatever, the miners or the loggers or whatever at the time that was popular. Anyway like so I mean it makes sense that a lot of our entrepreneurial stuff is it comes from the upbringing that we have and it’s just we don’t quite fit and we can tell there’s something wrong. I remember that’s what I always tell people about when I read Rich Dad, Poor Dad.

It put words to this feeling that I knew in my heart was true and I couldn’t verbalize it. Then I read the book and I was like that’s it. Like that’s what I’m trying to that’s what I like my soul is groaning to say and that’s why everyone says Rich Dad, Poor Dad was like the book that changed their life is because I think that’s true for a lot of us. That book put words to our.

David: Yes.

Brandon: Our groaning.

Shiloh: You know my son right now he’s 11. He’s reading that book right now and he’s really liking it.

Brandon: Nice. That’s awesome. That’s awesome. Tell me about the flipping. I mean how did that go? What was your first flip like?

Shiloh: After I got the commercial building I call up my buddy, Jason. He’s the realtor. He is my partner in most of our deals and so this was the very end of 2014. I said, “Hey Jason. I want to do a deal with you.” He said, “Well I have a deal that’s coming up and you can be the hard money lender on it.”

When I went to buy the building I opened up a large line of credit on my home in order to be able to flow anything that I needed to with the building in case people you know there was a mass exodus and everybody left or I had to you know something big you know what went wrong with the building. I’d have enough money in order to fix anything I needed to. I had this like $200,000 line of credit, this HELOC on my home and so I called up my buddy and I said, “Hey I want to do this deal with you.” He said, “Well you can be that hard money lender on this deal.”

I say, “Okay.” Then we go and we this was a really interesting deal. He was just kind of going around trying to solicit people to sell their houses as a realtor. After he would ask them to if they were interested in selling he would say, “Well do you know anybody else that’s interested in selling in the neighborhood? Somebody said, “Yes the people on the corner. They’re interested in selling.”

He goes and he approaches them. Now just to be honest I think this was a drug house so he goes over. He knocks on the door and they were going to be foreclosed on in about 30 days, both by the HOA because there were thousands I think just thousands of dollars in back payments to the HOA and also back taxes and so they have 30 days to sell this. He went and he had offered to buy the house for about $120.

Okay and they were going to also carry back a $40,000 note for when we finished the rehab and sold it and then we would pay that note off. That way it helped with some of the costs of getting into the property. I come in with about 83 or so to buy the property and then we rehabbed it for about 23 more and then they started calling us up. Actually what was funny is my buddy and I actually had to go and camp there because people kept breaking back into the house because they were just used to hanging out there and sleeping there.

He and I we go in and so we set up camp in this house and it was a great time. Anyway so we go in there, we do that and we get the property rehabbed and then they were you know really antsy to get their $40,000. They were saying, “Well you know hey have you sold the house yet?” Like you know it’s only been one month, we haven’t sold the house yet.

They would come back like a week later, “Oh is the house under contract? Have you sold yet?” “No’ it’s still not.” Then so then my buddy said, “Well I wonder if they would be willing to sell their $40,000 note for $30,000.” He calls them up and he says, “Hey you know what I have the investor on this property who’s willing to buy your $40,000 note for $30,000 and then you get that money right away. Then you don’t have to wait for your money.” They said no at first and they call back a week later to say, “Yes, we’ll do that.”

Brandon: Wow.

Shiloh: Then we were able to buy this $40,000 you know carryback note for $30,000 and then like a month or two later the house goes under contract and we sell it for about $195 and so I was the hard money lender on that property. I made you know $8,000 in hard money and then that $10,000 extra deal we did I made five of that and so I ended up making about 13 on the deal and my buddy made about 40.

Brandon: Wow.

Shiloh: He obviously made a lot more, but I was just the hard money lender, but I got to be a part of the entire process and I learned a ton from that process. That has actually really influenced what we do today as we partner with other people and show them how to flip like we’re doing.

Brandon: That’s awesome. I love that you use that like again a creative. Like you’re all about creative finance it sounds like. Like you’re really good at this stuff. Like you figured out how to use a home equity line of credit again this time to fund a flip that I’m going to make $13 grand on that I can now dump into you know go on vacation or reinvest it again. Plus you get to learn.

Shiloh: I bought my dream car.

Brandon: There you go.

Shiloh: I bought my dream car.

Brandon: What’s your dream car?

Shiloh: It was 2012 Toyota Prius, sea glass pearl, tinted windows.

Brandon: Nice. David was expecting like a Ferrari right? I see that look on your face David.

David: Yes, I was that Prius came out of left field. I was not expecting that at all.

Shiloh: Have you driven a Prius?

Brandon: I have.

David: You have a very practical dream.

Shiloh: I love my Prius.

Brandon: I do I love my Prius.

Shiloh: It’s great because I can well so right now as we’ll probably get into later I live in California and I live in Arizona and so I’m traveling back and forth. My work day on Friday night ends about 10 o’clock at night and then I get in my Prius and then I start driving on the 10. I drive for a couple of hours, I pull over. I have one of those IKEA mattresses that you know you roll up. You just have it you know flat in the back of my Prius and I sleep there for about six hours and then I wake up and I drive home. Get home by about 10 o’clock in the morning on a Saturday morning.

Brandon: That’s hilarious because like two years ago or no no, three years ago now my wife and I did a road trip all around the country and we took our little Prius and we went all around. I’m 6 foot five and half so like I’m a tall guy right and like she’s a tall lady. She’s like 5’ 10 I think. Anyway we both slept just fine in the back of our Prius all around the country. It’s fantastic. It was like it’s like six foot six from like toe so like I fit just fine.

Shiloh: Right.

Brandon: We had a sleeping bag. We had a little mattress. We had a little memory foam. It was amazing. You just pull over at a rest stop and sleep so that’s funny.

Shiloh: Yes. I loved it.

Brandon: Yes.

David: What is your head pushing into the windshield? Like Brandon is a tree. He needs a Trius. Not a Prius.

Brandon: No I—no it’s—there’s a lot of room back there you’d be surprised. Actually, I made a video. I found it on my. I’ll see if I can find the video and put it on the show notes for the show, which is at BiggerPockets.com/show 287. I have a video of me actually preparing the back for a bed and then turning off the light. It was like a time lapse video my wife and I made. Anyway all right back to your story.

David: You’re sleeping in that’s why it’s a dream car because you have dreams in the car. Alright okay.

Shiloh: There you go.

David: That makes more sense. Alright. Tell us Shiloh you learned a lot on this deal and it sounds like you kind of got you know like the juices flowing on how creativity works. I think that note idea is brilliant. I have honestly never even thought of that.

Like you know that the house is going to sell so the noteholder who doesn’t know that, you go to him and you shave another $10,000 onto this deal. You have a very similar strategy with your lease options that you guys are doing now. From what I understand of it you often have zero money of your own into the deal and yet you’re still able to cash flow and then see a big windfall of profit. Tell us how you have this structured and how all of the different creative things you put together have allowed you to invest in real estate with none of your money.

David: Okay, well I can tell you that, but really it took a while to build up to that so it took a while to gain credibility. It took a while to understand real estate before I could actually get to that point and so a lot of times on the podcast it’s talked about how to do real estate with you know none of your own money and my buddy and I we really do a lot of real estate with very little of our own money left in deals. However, it took a while to build up to that so like right after that deal that I did with my buddy and you say that you know it was creative, to be honest I didn’t know how to do that, but my buddy did so you know I encourage people to definitely partner up with somebody who knows what they’re doing. That’s what I did.

I partnered up with my buddy. He knew what he was doing and right after that deal I actually go into another flip where I was all excited to do this flip, but then I you know I didn’t know the numbers very well at the time and I ended up losing about $5,000 on my first deal by myself so again there’s still that learning curve. You know just to kind of give a brief overview 2015 we do three flips. My net profit mine was about 17,000. It wasn’t a whole lot, but I was learning. Each deal I learned quite a bit from and then in 2016 we do six flips. We buy some rental properties out in Indianapolis and then we also did this one seller finance deal. We were doing quite a few things, but with the six flips my buddy and I each made about $95,000.

Brandon: Wow.

Shiloh: Each of us on those six flips.

Brandon: That’s fantastic.

David: Take us back to the one that you lost money on. What did you do wrong that caused you to lose the $5,000?

Shiloh: I was excited about the property. I was looking for property. I talked with this guy that was buying properties at auction and you know this property came up for sale for about $103. I thought oh this is great. You know in the area they’re selling I could probably sell this for maybe $145-$150 and so we buy it and then there’s like this auction fee on top of it so we have to pay them another you know two or $3,000 to go and do the bidding for us.

Then our contractor comes and then we you know he is going and fixing everything. The rehab turns out to be like $35 when we didn’t think it was going to be that much, but we’re new at this. We wanted to make it really cute so we did, but it cost $35,000 and then after that there was also an unpermitted addition so what they had done as they had put this extra room. They had left the garage front and so when we bought it there was this room that had a garage front door.

You know when you look from the street you just saw a garage door and so, but it didn’t make sense because it wasn’t a garage. It was a door. We remove the garage and then you know after it’s been on the market we get this code compliance from the city of Mesa saying, “Hey you have this unpermitted addition.” Like I don’t know what you’re talking about. I go to the code office and I’m talking with them. They’re like, “Yes you didn’t have permission to do that.”

I’m like, “Well we bought it that way.” “Well unfortunately you know you didn’t have permission.” We had to go to somebody who drafts what is it? Not an architect, but a draftsman. He needed to create some plans for the addition that was already done.

We had to go to the city and get those approved and we were really close to not getting them approved because and they would have had to they would have had us take that carport conversion back to a carport and then we would have lost. You know, I don’t know a 150 square feet and our ARV would have gone way down. It was really honestly a few inches too short to actually have it have there be like a driveway to the side to be able to go into the backyard where we had to put some covered parking because there had to be covered parking on the property. There wasn’t any way of doing it in front so we had to put some in the back and because it was too close to the neighbors fence they were so close to letting us or not having us do that, but they finally said okay you guys you just put some covered parking and we’ll grandfather it in. It will be okay.

David: Wow.

Shiloh: This huge process happened and so ultimately we ended up losing about $5,000 on that deal.

Brandon: This happened to me on my last flip or one of my last flips where I had found out after closing that the garage conversion to part of the house was done without permits and therefore the city or the county. It was a county property. The county wouldn’t let me do it and so I went to the county, went back and forth of them trying to do it. At the end of the day they would not let me do it. They basically said, “We want you to tear it all down, down to the ground. Rebuild it all back up again.” Even though it was fine the way it was. They just wanted it completely gone.

Shiloh: Yes.

Brandon: Which of course was so I just turned it into a garage and that flip turned out fine I guess. I mean it would have been a wash probably. The market helped me a lot I guess, but I guess I’m wondering like how do you prevent against that? David, I would like to know your thoughts as well like do you guys go into flips and go research permitting areas now before you close on a property or is it just that’s the one in a hundred that just sucks and that’s why we do lots of them.

Shiloh: For me yes, that really did suck to be honest. Again, that was the very learning and growing experience because you know you’re going to get into things like that in real estate. If you have a plan, this is how it’s going to look, you will likely be frustrated because frustration stems from unmet expectations and you will have unmet expectations most likely with each property that you do.

Brandon: Yes.

Shiloh: It’s just the idea of you know you learn and you grow, but you know moving forward no to be honest we don’t go looking and seeing hey was this permitted, was that permitted? It also depends on the areas in which we’re in so like I’m here in you know I’m in Arizona. I’m also in Burbank, California and Burbank it’s funny because half of the city is not permitted, but half of the city has been grandfathered because it’s an old city. There’s tons of stuff that has been done so as long as you don’t do anything else to it you know and it works then there’s a lot of unpermitted things and so when we go into areas where there’s unpermitted things we really ask ourselves okay what is the likelihood that the city is going to come in and say, “Hey there’s issues here and issues there.”

If the likelihood is small and our contractors are knowing what they’re doing and they’re going to go and make sure that everything is safe then we just, we make it look nice and move forward. You know we’re not going to sell something that’s going to be dangerous that is going to have bad wiring or something like that and so we do have our contractors look over the whole property and make sure that everything is nice and safe. That’s what we do.

David: It’s funny you ask this question, Brandon because I also have a story just like you guys where I bought a property and it was unpermitted and I bought it from an auction just like Shiloh’s and now I’m starting to think that maybe that’s exactly why they put these properties at auction because they know that we’re not going to do as much due diligence right. Whereas if you put it out there on the MLS and it’s a very quick search in you’re like oh that’s not permitted. Now to be fair something not being permitted really isn’t like the end of the world and sometimes it doesn’t make a difference at all. Right the problem with mine was it had been vacant for a year which meant in Florida the city has to send out an inspector to make sure it’s not going to burn down when they turn the power back on if it’s been the power has been shut off for a year.

Brandon: Yes, yes.

David: Right so while he’s there he’s like oh let me just take advantage of this opportunity to tag the crap out of everything else that I see in the house right.

Shiloh: Right.

David: He goes crazy with his little red tape just like the Grinch on Christmas ruining everybody’s lives and he comes back with a laundry list of stuff I have to fix and one of them is like a third of the square footage of the entire house is not permitted. You have to tear it down. I just go ballistic like what on earth. I have to take it like not only am I losing the square footage, but I’m paying money to lose square footage and make my house worse. It’s like the worst scenario that you could ever possibly have.

Shiloh: Yes. This is a quick tip for that never give a city inspector the lockbox code before you get there because they just get creative and they go and they start looking things.

Brandon: Yes.

Shiloh: In other words if they’re going to come there make sure that you have enough people around the house so that it makes it very difficult for them to move through the house and just make sure that they stand in their way as much as possible because when they get in there.

Brandon: Quick Tip.

Shiloh: They start looking around again going back to the house we had in Mesa.

Brandon: That’s funny.

Shiloh: He then looks and he says, “Well hey your smoke alarms are not all connected.” I’m like, “What are you talking about?” “Yes, you need to connect all of your smoke alarms through this system of wires.” I’m like, “They didn’t say that at Home Depot when I bought these smoke alarms.”

Brandon: Yes.

Shiloh: Again and it was because he got there like five minutes before we did and he started going through a whole bunch of stuff. Definitely make sure you’re there. Make sure you have a lot of people there just kind of standing in the way and saying, “Oh that’s stuff good. That stuff is good.”

Brandon: That’s funny.

David: I’d call the local police department and have them search him for warrants and unpaid parking tickets and like stand in front of that bedroom door you don’t want him to go in and be like, “Are you sure you want to come in because I got a list of parking tickets that you owe about $400 on. Is it worth it for you to get your little tag out?” Yes, I don’t know exactly like how you avoid that, but I honestly think now sellers who know we’re going to have a big problem like this are probably putting their houses auction. Amazing as this sounds there was so much meat on the bone when I bought the deal. I’m still going to make money. I’m just going from what I thought was grand slam to like a double or a triple. You know like I’m not losing money on this deal at all.

Shiloh: Yes.

David: It’s still a good investment, but you like you said you said something very insightful. The frustration comes from the unmet expectation. You know I was a psychology major and they taught us the definition of frustration is interference with the desired goal. Those your expectation was your goal right so it’s one of the things I see that holds back certain people that get into analysis paralysis is usually like the engineer type mind that wants to put everything in a box. They want to turn it into a science and when something happens that doesn’t go according to plan they lose their minds like the Joker says in Batman.

You know like they just freak out. “That’s not what I expected to happen. My expectation was it would be smooth.” Real estate investing is really more of an art. You kind of have to like give and flow with the thing and that’s why creativity is so useful because when problems come up you haven’t seen you want to look for a way to solve it so I’ve just learned that you got to hold these things with a loose hand and you have to take a big picture approach and say, “Sometimes I’m going to do way better than I thought. Sometimes I’m not going to do as good as I thought, but at the end of the day I’m going to do way better than if I didn’t invest at all.” Because some people their whole careers get killed just from that unmet expectation and they get frustrated by it and say yes this wasn’t what I thought. It’s so like mentally disturbing to them that they just throw in the towel and give up.

Shiloh: Yes, yes absolutely I think the psychology really does have a big impact on whether somebody invests, whether they don’t invest. What their risk tolerance is and so yes I just second what you just said.

Brandon: There you go.

David: Well tell us a little bit about Shiloh. I love your strategy. I think it’s one of the most brilliant things I’ve heard and the listeners are going to love it too. Tell us how you’re structuring these deals.

Shiloh: Yes.

David: How you’re buying them, how your funding them, and then your exit plan of a lease option I think is fascinating.

Shiloh: You know as I was saying in 2016 we did those six flips and then we started noticing that there was less and less meat on the bone and was getting harder and harder to find flips that had enough spread to make it worth time for my wife and I to do a flip. You know my wife is actually in California with my kids at this point so in 2016 we moved our family to California because my now eight-year-old daughter wanted to do acting when she was six. Before real estate we weren’t going to be able to do anything like that, but then when real estate came along and we were able to increase our money basically we then all of the sudden a lot of options started to become available to us.

We moved our family out in 2016 to California. At this time my wife is in California and I’m going back and forth from Arizona to California and so I really have to structure my business at that time better. I had a coach who was teaching me because I did a real estate training. It was one of those expensive trainings that I know BiggerPockets doesn’t like so I did one of those and then.

Brandon: I don’t mind them.

Shiloh: I did have a coach and one of the things that he told me and he told me a couple of things that were really really great, but one is he said you need to get an assistant. Every time I talked with him and I talked with him every week he said to me, “Do you have an assistant yet?” I said, “No.” He says, “You need to go get an assistant.”

I finally went and got an assistant and you know I was just paying her hourly, but she made it possible for us to be able to switch this model to doing these lease options because they were going to take a little bit more time and effort and with my wife in another place and with me only there half the time I needed somebody to be able to do a lot of things that either I couldn’t do myself or that wouldn’t be worth my time going and doing. Anyway going back to what you were saying when in 2016 when we found that the the margins were getting smaller we went to another training and it was a pretty inexpensive training in Phoenix that where this guy talked a lot about lease options. My buddy and I went, my partner and I and we decided, I wonder if we can switch over to this lease option model and so we were running the numbers and running the numbers and we decided you know what I think that we can. There I am in 2016, we had a couple of properties that we still had and so we switched them over to the lease option model.

This is specifically our lease option model. What we tried to do is we tried to get our all in, meaning the purchase price and the rehab we want all of that to be $140,000 or less and so in our market that works really well. We want that to be 75 percent of the ARV. To give an example let’s say we buy a property, this is a property that we did. We bought a property for $93 and then we put about $47 into it and so we’re into it about $140 and then the ARV came at or the appraisal came in at I think it was $190.

Then we sold that property on the lease option for $195. They come in with an option fee and then so they come in with the option fee. That helps give us some money back. We also were able to get a loan on the property at 75% of the ARV because we have a great relationship with that bank and we’ve done—I  mean they gave us 16 loans in 2017.

Brandon: Wow.

Shiloh: It was great. It was a great contact that I got from another investor so we went. We did all of these loans with him. He gave us 75 percent and so we’re into that property you know practically nothing.

You know they gave us that option fee of you know a lot of our option fees are about $3,900 so they give us an option fee that brings it so our all in a zero and then we’re still cash flowing about $100 each on this property and they have this option to purchase the property anytime between now and within the next five years.

Brandon: Let me I want to unpack all of that first of all so you find a property that needs to be fixed up.

Shiloh: Yes.

Brandon: You buy it, you said using is it like your HELOC that kind of money like you said—what did you say there?

Shiloh: You know I told you about that program that I went to. One of the things they taught us to do was how to access credit lines, how to just basically how to access credit and so I went from having $200,000 available credit up to about $800,000 of available credit in about a year and a half time.

Brandon: Wow.

Shiloh: I had to work and work and work with banks and so you know as part of our little team that we have that does real estate, my buddy’s the realtor and basically I’m the money guy. I go and I find money. I find money through banks. I have some of my own money and then we partnered with probably 20 people in the last year that bring in money in order to do deals with us.

Brandon: Alright so I want to talk on the credit line thing real quick. Are you talking like business lines of credit or are we talking credit cards or what are you talking?

Shiloh: I’m talking business lines of credit.

Brandon: Okay.

Shiloh: Credit cards, business credit cards, signature lines of credit, portfolio loans, home equity loans, any type of loan almost.

Brandon: Okay.

Shiloh: We’ve worked towards getting those credit lines.

Brandon: That’s fantastic. Alright so I mean obviously you got to be careful with them. Basically what you were saying you’re doing then is you’re buying them with this money, this short-term money basically, right. Maybe higher interest, higher payments, whatever, but you are just doing that, but not really.

Shiloh: Yes so it’s not really I mean we buy most of our properties with hard money lenders.

Brandon: Okay.

Shiloh: Hard money lender comes in and because we have really good relationships with these hard money lenders they’ll sometimes lend us between 90 and a hundred percent of the purchase price and even on some of the deals that we’ve done like we did a deal that the purchase was $110 and actually this was a funny deal. This was originally was a mobile home that had continually been built upon and so it was more structure you know structural built home than it was mobile home. That one we did have to get a lot of permits on. We then converted the whole home to a structure built home and the rehab was like $100,000 so the hard money lender was willing to come in and lend us about $200,000 on that property so he lent us for the purchase and then about $90,000 of the rehab because the ARV was like $285-$290.

Brandon: Nice, that’s actually just a really good point to bring out like if you want to find you know hard money lenders to fund most of your deals, I don’t know many that will do a hundred percent, maybe they will. If you want to fund most of your deal just find really really good deals. Like a hard money lender—job like their job is to get as secure loan as possible so that they win no matter what. The better deal you get, the better chance you find of a hard money lender like that. Okay so you’re buying it with hard money. You’re using the credit lines then as like rehab money is that like where that comes in?

Shiloh: Yes.

Brandon: Okay.

Shiloh: We were using those more as rehab funds and things like that and just real quick on the hard money we didn’t get those loans at the beginning.

Brandon: Yes.

Shiloh: We built up that relationship with the hard money lenders until eventually they started giving us those types of loans because they saw our track record. Going back to your question we were using a lot of those credit lines to you know flip and then also to get some of these properties, but then you know over time as we’ve been doing this I’ve been able to pay off the majority of all of those credit lines. Even though I have like you know maybe $800,000 available you know I might be using maybe I don’t know $400,000 right now and that’s a huge equity line at a low interest rate and then a couple of other ones at pretty decent interest rates. Some are business lines and some are personal.

Brandon: Alright so you buy a property with hard money—use in some business lines of credit for however rehabs and whatever. You’re getting the property done, looking beautiful. Now the thing is worth way more. Now you are going to that local community bank. You’re getting a refinance on it so you can pay off all of that short-term money and now you have a nice long probably what is it 30-year mortgage on it I’m assuming.

Shiloh: They’re giving us business loans on this.

Brandon: Okay.

Shiloh: These are 20-year mortgages, five-year fixed and so they adjust after five years, but that’s where the lease option comes in because we do lease options for five years.

Brandon: That’s awesome.

Shiloh: That way you know the people in the home and we just don’t just put anybody into our properties. We’re not looking to you know re-lease option these over and over and over again. That’s not what we’re looking to do. We look for end buyers, people that want to come in that for one reason or another they can’t purchase the home right now because they may have had maybe their business you know collapse in the financial collapse a couple of years ago or maybe they’ve had some medical bills or something like that.

They’re good people. They have solid jobs. They are you know they have a good income. We bring them in because they really want to own their own home.

They don’t want to keep renting and renting and moving and things like that so they find that we’re doing this lease option like, “Oh that’s perfect.” Yes I can, I’m happy to pay the option fees so that I can buy this property and a lot of them when we give them these five year lease options they come up and say you know what my goal is to be able to buy it in the next two years. You know they’re happy to be in there. They’re grateful to be in there and they take really good care of the properties.

Brandon: Cool.

David: Can you give us a basic definition of what you mean by lease option for anyone who isn’t familiar with the term, hasn’t heard of it. We don’t talk about it a lot on the podcast.

Shiloh: Yes, so a lease option you have to be careful also with a lease option because there’s different laws that have come into effect such as Dodd Frank and other things like that. They tried to protect people from getting into mortgages that they’re eventually not going to be able to pay and so what we do is we qualify somebody to lease our properties by you know we do a background check and a credit check. Then we also verify their income so they have to make three times more than the lease amount every month. Okay so we lease it for $1,200, they need to make at least $3,600 a month and so that has the lease portion. Okay and it’s just a regular lease except a couple of things that we do put into the lease to make it so that the property management is really low is we rather than leasing it at $1,250 a month, we lease it at $1,350 a month and then in there we include this line that says, “If you take care of the property, if you take care of all of the things that need to be taken care of, we will give you a hundred dollar discount a month on the property.”

Your rent will only be $1,250. They go and they take care of things. They’re not asking us. They don’t say, “Hey you know somebody threw a rock at my window and broke.”

They go and they take care of that because it’s understood that we’re not putting in renters, we’re putting in end buyers. The end buyer wants to get this property and so they’re going to take care of it better. Just as if you were to buy a property at a and get a mortgage on it you’re not going to go to the bank and say, “Hey my dishwasher stopped working.” You’re going to go and you’re going to buy another dishwasher because this is your property.

When we put somebody into these properties we make sure that everything major is going to work on this property. We are not putting in somebody into a property that has a bad roof or that has the plumbing is shot. If we find that the plumbing is shot like after we’ve already done it and we’ve looked it over, if we found that there was something that we did not notice in the rehab that there was an issue with the roof, we go and we take care of those things. All of the little things, we expect them to come and take care of.

The option is a separate document than the lease and basically it says you have the option to purchase this property at any time between when you first get the option up until and then whatever time period it is that we decide. Last year, we did five-year lease options. This year we’re doing four year and next year we’re doing three year. Then in 2022 we’re going to have a lot of our lease options coming up and at that point we’re going to be able to you know kind of bunch some together in order to possibly do a 1031 exchange into some larger deals at that time. That’s kind of our strategy over the next five years.

David: What are some of the benefits of a lease option? Why would somebody want to do that opposed to just being a landlord and renting it out?

Shiloh: With—you know being a landlord, you put renters into your property and I don’t know if you guys have ever rented a property versus bought a property, we rented a property and something happens you’re just not that sad because it’s not your property.

Brandon: Yes.

Shiloh: You know what I mean? You’re like, “Oh well, well that’s a bummer for the owner.” When you own the property or when you’re working towards owning the property you do put you know there’s a piece of you in the property and they come in with this option fee so there’s a part of them that’s really invested in the property. You get in my opinion, you get better tenants, people that are going to take care of the property. Then for us we really don’t have to budget for like the top three expenditures.

We don’t have to budget for capital X because were for capital expenditures because we are only holding the property for a five-year period of time and all of the major things have already been done during that time. We don’t have to factor in for vacancy because they’ve put in you know $3,900 to sometimes up to $10,000 in some of our properties to have that option to buy the property. They’re committed to buy it. If they were to just say, “You know what, there was an issue we have to move out of state and take care of my you know my mother who is really ill.”

Then we say, “Well you know what we’re really grateful that you were in our home that you took care of it and we’ll be a great reference for you out there.” Then we bring in somebody else to that property. They bring in another you know $3,900 fee and so we can go and we could turn that property and make it nice again for that amount. You don’t have to budget for vacancy, capital expenses, or repairs because they take care of the repairs.

Brandon: Yes, that’s cool.

David: You know by the way what you’re describing if somebody is hearing this and thinking this is incredible. I had no idea. Well I know that person hasn’t read Brandon Turner’s book on the book on No Money Down Investing because this is all stuff that he pulled right out of the book and you’ve taken the pieces of it that you needed and combine them together to put the strategy together. If I understand you right, what you’re basically doing is giving up the potential upside if you have a huge market run. Right? If your property goes to $300,000 well there is a lease option that he could buy it at $195 and your tenant.

Shiloh: Yes.

David: Going to get a great deal. What you’re gaining is the lease option fee upfront so now he is emotionally invested and financially invested in this property. You’re getting rid of the two biggest cost in my experience in 2018 for real estate investing which is capital X and maintenance fees because they’re saying well we’re going to pay it and you’re only having to give up a hundred bucks a month or so in rent to get that. You basically created stability while you gave up you know the opportunity that it could have went crazy so you know when I look at the strategy you’re discussing it would work great in a market where you’re not expecting huge appreciation or maybe you feel like you’ve already had a really good run and there’s not a whole lot of room to go. It’s not a thing you’d to want to use if you felt like oh this is the next emerging market that’s going to take off on me right.

Shiloh: Right.

David: For the area you are in this could work perfect.

Shiloh: Sure and also one thing that we do to account for that is we usually sell the properties for about five to seven percent higher than the current ARV and so if the market continues to go in the direction that it’s going by the time they exercise the option they should be able to get that discount so it should appreciate you know 10 to 15 over the next you know three to five years in our market anyway. They’re getting a discount on the property. They’re happy, but we’re happy because we’re selling it for a premium today. If I bid this model with the one that I lost $5,000 on back in 2015, I wouldn’t have lost money. I would probably have gained $20 to $30,000 on that deal.

Brandon: That’s cool.

Shiloh: Just to give you an example of why we like these lease option models because let’s say a flip that where my buddy and I could each make $10,000 you know a flip where there’s a profit of about $20,000. If we use the lease option model he and I make about three times the amount that we would normally make on a flip. Rather than us each making about $10 on a deal we’ll make $30 on a deal. Each property that we get from the get-go we usually have a $30,000 increase in net worth right up front and then over the three to five years we make about $30 to $40,000 each on each deal.

Brandon: Here’s what I love about this is you’re taking all of these different strategies I mean like let’s let’s list them off real quick right so you got the BRRRR strategy, which we talk about right. BRRRR investing, buy, rehab, rent, refinance, repeat. You got that. You are combining that with hard money, combined with business lines of credit. Combined with the lease options like all wrapped in together. You created this strategy out of I mean I doubt I mean like again like you created the strategy may be if somebody told you exactly to do this, but I’m guessing you just figured that out a little bit along the way right?

Shiloh: Yes so this was a hodgepodge of like three or four different strategies put together.

Brandon: Yes, that is supercool and one other benefit I know or maybe you covered this one, maybe you didn’t, but when you’re selling let’s say a tenant does agree to buy the property and they close on you know we use the number 195 earlier, you don’t have a real estate agent involved in that. You’re not paying now.

Shiloh: Right.

Brandon: $12 grand to a real estate agent to close that deal. You would have made $12 grand more than if you would’ve flipped it.

Shiloh: Yes.

Brandon: You would have had to sell and the other thing when I hate flipping like I like flipping houses, but the thing that drives me nuts about it is like when I’m going to sell it it’s like there’s like laundry list of stuff that the person wants to get done.

Shiloh: Yes.

Brandon: They do their inspection and now they got this thing and I don’t like this spot on the carpet and like. I know I can say no, but then now I am emotionally in like lease options no. They are already living in the house.

Shiloh: Exactly. They live in the house. They’ve lived in the house. They know exactly what the house is like and so and we put that in the option fee. We say so when this goes time to sell the property there’s not going to be any realtor fees or anything like that and then they’re going to be paying the closing costs basically.

They see that. They know that and so there are very little closing costs. We just have some title fees about one percent, but it really does cut out so many costs and again so think about that. You are really ultimately giving it you know some of it’s highest and best potential profit. Cutting out a lot of the costs and people are happy to do this. It’s really worked out well in so many areas and of the 16 that we did last year in 2017, we have not had any move outs. Everybody has paid rent so you know we’ve had zero vacancies. Everybody has paid rent. It’s worked out really really well.

David: You’re also reducing your capital gains from short-term to long-term if you’re going over this five year period so.

Shiloh: Yes.

Brandon: Yes.

David: You’re making a decent income. Anything less than a year that you sell you’re getting taxed at whatever your income bracket is, which can be really high and if it’s a short term I believe what is it 15% straight. I think.

Shiloh: I think so yes.

David: Yes that could be a big difference if you’re getting taxed at 30-35 percent on your income and you only ever pay 15. Brandon I know that you’ve done some of these why aren’t you doing them anymore?

Brandon: Me? Yes, I did yes so back in the day I used to do a number—I did a few I shouldn’t say like lots of them, but I did a few of them. Here’s my problem and maybe you’ve got, Shiloh you figured around this. The problem I was having is that nobody knows all the tenant people that were calling nobody knows what a lease option is or rent to own you know like nobody knows what that actually means because tenants aren’t really instate investors right.

Shiloh: Right.

Brandon: I was getting I would get 50 phone calls from people and every one of them were the worst people I’ve ever met. I mean like they’re real it’s like, “Yes, I need a home for my marijuana grow operation and to store the bodies.” You know like it was just like the worst people and I’m like well do you have any you know what your credit like? I don’t have credit. It’s negative. You know like.

Shiloh: I have cash.

Brandon: Yes.

Shiloh: A lot of it.

Brandon: Yes, exactly, yes. It was. I mean every single.

David: I steal the credit for the victims of the bodies that I’m killing.

Brandon: Exactly.

David: I use a different one on every house.

Brandon: Like it was like that and so like I got so disheartened with people from doing—now granted I was doing this in a very lower income, rougher neighborhood of Aberdeen, Washington. I just couldn’t handle all of the phone calls. That was the primary reason. Shiloh what do you do about that? Do not have that or is that where the assistant comes in?

Shiloh: That is where the assistant comes in. No, I’m just kidding. Let’s see. We actually don’t have that big of an issue with it, but a lot of them don’t know what the lease option is.

Brandon: Yes.

Shiloh: They were calling up my buddy, the realtor, and saying, “Hey what’s this lease option?” What he did is he went and he had this video made. It’s like a four minute little cartoon video that is fantastic and it explains the lease option really really well and so I’ll have that up on my website so people can take a look at that video and kind of see how it’s explained. It’s explained very very easily and so when somebody is interested in one of our properties we explain so you know you have the lease and then you buy this you buy an option to be able to buy the property in the next four years. I want you to go and take a look at this video and if you’re still interested give us a call back. That’s what we do.

Brandon: That’s genius like I had never thought of doing the video idea. I love that idea. Yes.

David: I have a video like that for my real estate agent business.

Brandon: Yes.

David: Basically, it’s like a 60 second video that says, “This is David. He was a police officer. He invested in real estate. Now he buys houses. This is all the stuff that he’s done. This is why you should work with him.”

I send that to people when I first meet them and they know nothing about me. It’s like, “Oh look at that it’s so cute. He doesn’t seem so scary anymore.” I am a huge proponent of these videos. Like you, I think I got mine made for three or $400 bucks. I bet you there’s people that will do it a whole lot cheaper than that.

Brandon: Fiverr for like five bucks.

Shiloh: Yes.

David: That smart people like Brandon would have figured that out. Yes, like anytime you’re looking to raise money from people or you’re looking for a partner like let’s say that you want to flip houses and you say, “Hey, I’m the rehab guy. I need money.” You get sick of explaining to every single person exactly how this works because you make a video that explains it and you send it to him and it’s like very engaging and makes someone to talk to. I think that’s a great idea Shiloh.

Shiloh: Well, I mean we do this for the people that want to do the lease options with us, but people that want to like partner up with us. It’s not really partnering up with us basically people that want to learn our system we we’ll let them come in and they fund a rehab and we show them the whole thing from start to finish. Then they give their money back and then they get interest on their money. It’s really a win in all directions.

We win because now we have somebody coming in with the rehab money. We have somebody that wants to learn. We get to you know share with them what we’re doing. They learn. They’re grateful for that and then they can go and they can do their own deals. With those we don’t show them the video because I like to work personally with people that want to learn and so they come in and I work with them personally without the video.

Brandon: That is the coolest idea. I’ve never heard of anybody doing that, but I’m totally going to steal your idea here, Shiloh. Like I’m going to bring in people.

Shiloh: I’ll trade marketing with you.

Brandon: Yes, you should totally.

Shiloh: I’ll trade marketing right now. Right now.

Brandon: I’m totally going to steal this.

Shiloh: I just sent a text to my lawyer.

Brandon: Yes, there you go. Good so like.

David: Is that all it takes to trademark something? One second, Brandon. Have you guys seen the episode of The Office where Michael declares bankruptcy?

Shiloh: No.

Brandon: Oh, I’m sure I have.

David: He just opens the door and screams, “I declare bankruptcy!” He thinks like that’s all the. They’re like you can’t just say, “I declare bankruptcy.” He says, “I didn’t say it. I declared it.”

Shiloh: That’s pretty much all you need to do.

Brandon: That is pretty much for a trademark that’s all you have to do really. No, anyway if you want to patent it that’s more complex. Okay so here’s what I’m like—you’re basically finding people who are up and coming, wanting to get involved in real estate and you’re saying look if you want to learn everything that I’m doing you’ve got to fund my next deal and it just like you did as hard money lender when you got started, which is supercool. I love that this has come in full circle.

Shiloh: Yes.

Brandon: Now that—now you get funding for a real estate deal, they get to learn and you can avoid the—all the high fees and points of hard money. I am totally stealing this idea to fund my next deals.

Shiloh: Yes, right. Yes.

Brandon: This was the coolest idea ever, but anyway.

Shiloh: At the same time we do give you know a good rate to the people.

Brandon: Sure.

Shiloh: That come in to learn and so it really works out well. I mean when you think about it total cost wise their money is usually just invested for about four months.

Brandon: Yes.

Shiloh: Even if we’re giving you know 10% or something their money is only invested for a short period of time and so, but still they’re earning money on the money. They get to learn the process and so it’s been a really great. I’ve met some really good friends doing this and they tend to be really grateful and then they come to my meet up and it’s great because then they share hey with a deal over here with Shiloh.

Brandon: Yes.

Shiloh: It worked out great and so it has been awesome all around. It really has.

Brandon: That’s so cool. I’m really impressed with that so. Anyway, keep that up. Alright so.

Shiloh: Yes.

Brandon: Super cool. Let’s see so you’re doing the lease option thing so here’s one more thing I want to talk about the lease options. One of the other difficulties that I’ve found is that a lot of people who go into lease options, the tenant or tenant buyer so to speak they don’t end up buying the property. I mean I think I once read a stat that said 90% of lease options never fulfill their thing. Now obviously they don’t have to.

It’s an option. They’re not required to. They’re not under contract that they have to, which is an option, but how can you increase the chance that the tenant will because you ideally you want them to buy it I’m assuming right.

Shiloh: Yes.

Brandon: I mean if they leave you can always just redo it again, but it’s nice to get out of.

Shiloh: Yes, we don’t set out to buy any property that we want to do a second type of lease option. All of our properties are really set up to just do the lease option once and that’s our goal with them. You know you talk about that statistic, but then again you think about well where was that statistic coming from and then you think oh I wonder if this is why the Dodd Frank Act came out because of the way that they were setting these things up. If you look at our specific model, our specific model very simple.

We’re not selling it for way overpriced of the market. We don’t have this exorbitant amount of lease option fee that they have to come in with and so it is really for the everyday person that wants to come in that if they work on repairing their credit over the next year or two they’re going to be able to get a loan. All of the properties that we do or the majority of them I should say are under the median price point for the property so there’s a lot of interest in that price point and then also it’s just easier to get a loan on those.

Brandon: Yes.

Shiloh: Types of homes and we connect them with a mortgage company or a mortgage broker.

Brandon: Yes.

Shiloh: Who then helps them get their credit where it needs to be so after they’ve been in our property for about a year we’re starting to now connect them with these mortgage brokers that will help them get to where they need to be in order to purchase the properties. Then when they purchase it, in all honesty their monthly payment is going to go down.

Brandon: Yes. Incentive for that.

Shiloh: It just works. It works for them. It works for us and so and you know we haven’t held these for the whole five years yet to be able to say well this is our percentage.

Brandon: Yes.

Shiloh: My honest guess with all of the people that we have in there I think that ours is going to be much much higher than the average.

Brandon: That’s awesome. Yes, that was the idea I was going to go with at some point if I get back into lease options, which I guess I kind of am with mobile homes, but anyway like is—hooking them up with a mortgage person like helping them because most people can get mortgage if they just know how. Like I have a friend who did a lease option and wasn’t able to fulfill it. Like he leased optioned actually from another friend of mine they couldn’t buy the house though because he quit his job right in the middle of it.

Shiloh: Yes.

Brandon: To go like be self-employed.

Shiloh: I knew that.

Brandon: Great for my friend like yes, great for him—wanting to go be a contractor on his own. Like I love the guy, but at the time I was like dude like you will kill your shot of getting a mortgage if you do this. He was you know like these people just aren’t cognizant of what mortgage lending.

Shiloh: Right.

Brandon: Laws are and rules are so hooking them up with a mortgage lender I wonder could you even require it? Maybe you don’t do this, but could you require them to meet a certain number of times? Like you have to meet once a quarter for the entire lease option with the mortgage person. Is that weird? Have you ever thought of that?

Shiloh: No, it’s a good question. We haven’t thought about that personally. That would be something to look into. Right now we just have them—you know we introduce the mortgage broker with them and then we follow up with the mortgage broker and say, “Hey how’s it going?” We follow-up with the tenant and we’re asking you know what’s before they even get into the property we say, “We only want people to come into our properties.”

Brandon: Yes.

Shiloh: “That our end buyers.” That really really want the property and then when they say yes then we hook them up with a mortgage broker and so you know were hoping that this is all going to work out, but we’re going to follow up with them regularly.

Brandon: That’s awesome. This is so smart. Everything you’re doing so fantastic. This has been really really good so far and we’re not quite done yet because we’re going to head over next to the world-famous fire around.

David: Fire Round.

It’s time for the Fire Round.

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Brandon: Alright let’s get to the Fire Round. These questions come direct out of the BiggerPockets Forums and so we’re going to fire them at you right now and see what you got to say. Number one, I’m a little confused on the difference between lease options or a lease purchase or subject to. What’s the difference?

Shiloh: Good question and so you know we really do focus on the lease option. I think the lease purchase and again I’m not an expert in this, but I think the lease purchase is the you’re really agreeing to this purchase. Actually I’m not really going to comment much more than that because I don’t know a whole lot about it.

Brandon: Yes, I get the feeling they’re pretty similar. I think they’re very subtle if there’s any differences there. Anyway.

Shiloh: Yes.

Brandon: Then there is the subject of to is yes.

Shiloh: Yes, subject to is different in that a lot of times you go to somebody that may be having a hard time financially with the property and then you come over and you negotiate with them to keep their mortgage in place. You’ll help them get it to where it needs to be with the bank and they’ll sign you over the rights to the home and then you now have this property with the mortgage already in place that you can then sell to someone else or you can lease option to somebody else or rent out and so you are able to use their credit and their mortgage. You’re actually also helping them rebuild their credit so that’s more of a subject to. That is a different animal than the lease option.

Brandon: Cool. Alright.

David: Here’s a question lease option is a lease option. Have you ever done a lease option agreement with a seller for six months then lease option the property to a buyer for three months? I was running numbers and wanted to know if someone has done this and if so how successful was it?

Shiloh: We haven’t done that. The reason why is because we want to be a little more involved with the property. We want to keep the property for a longer period of time because as the people are in there they are paying down on mortgage on the property.

David: Yes.

Shiloh: That’s another form of income is the mortgage paid down so we don’t do it that way. We like to do the 3-4-5 year terms.

Brandon: Cool. What about this as I can either do a lease option contract or.

Shiloh: Okay.

Brandon: A rental agreement and a separate option agreement. Which is better in your opinion? Like one document or two?

Shiloh: Definitely the two separate documents and the reason being is because you don’t want something to look like a mortgage because then you’re going to get into the Dodd Frank you know issues and so we don’t do right now were not doing any credit backs towards the purchase price because of the Dodd Frank act and so you want to have your documents be separate. You have a lease agreement and then you have this separate side contract, which is an option to buy the property.

Brandon: Alright.

Shiloh: That just helps keep you more safe when it comes to legal reasons and things like that.

David: Okay when you are lease optioning homes to tenant/buyers what percentage actually end up exercising the options? Does that matter and if it does matter are there ways to improve the likelihood that a tenant will exercise his or her option?

Shiloh: You know as we talked about before historically it’s been said that the that a lot fewer people actually exercise the option. What I believe and we haven’t gone the full course to test this out, but at what I believe is as you’re working with the tenant buyer and as you know if it’s a longer term lease and they have more time to actually rebuild their credit and things like that I think that you’re going to be able to get somebody in a better place to actually get a loan on these properties.

Brandon: Alright the last one here. I’m going to do one more. My tenant wants to buy my property. I’m willing to sell except for they have a horrible credit. What are some tips I can give them to improve it?

Shiloh: Tell them to pay their bills on time.

Brandon: There you go.

Shiloh: That is the first thing, but no hooking them up with a mortgage broker who will then sit down with them and say, “In order to get your credit to where it needs to be you need to do this, you need to do this, and you need to do this.” Hooking them up with somebody specific that actually gives the loans is going to be a better way of getting them ready to actually you know exercise the option. Especially if you do it like with a year or two in advance notice. They have time to actually do the things that they need to do.

Brandon: Yes, there you go. Alright awesome well that is the end of the Fire Round. It’s not the end of the show because we have next our.

Famous Four.

Brandon: Alrighty so with that let’s get to the Famous four. Number one what is your favorite real estate related both Shiloh?

Shiloh: That’s a really great question. I’ve been thinking about this a lot and I think it’s probably going to have to be two favorite business books? Can I switch over to business books.

Brandon: You can. You can if you want, yes.

Shiloh: Okay.

Brandon: Rob steal David’s thunder here.

Shiloh: Oh my as I mentioned to you before there’s Cash Flow Quadrant by Robert Kiyosake. I love that book and then there’s the classic Richest Man in Babylon. I love that book.

Brandon: Yes.

Shiloh: Then I’m going to go for a different one. I’m going to go with Shoe Dog.

Brandon: Okay. The Nike story.

Shiloh: Have either of you guys, yes.

Brandon: I’ve not read it.

Shiloh: Yes, the story of Phil Knight you know that book was very very helpful for me especially more recently because if you read that book you hear his story of you know building and every month you know or every year his business was like you know doubling in size, doubling in size, and he was having the hardest time going to banks and getting funding for his business. That was one of his biggest deals or biggest challenges and so you know going through that whole process and seeing the struggle and hearing about that struggle it help me feel like okay you know if I’m going to get bigger there’s going to be struggles. One kind of affirmation that I have for myself is I don’t shy away from big challenges.

Big challenges I welcome big challenges because they’re an opportunity for growth and learning. I don’t shy away from those. I really like that book in kind of motivating me to take them head on.

Brandon: There you go fantastic. Alright David. I won’t rob your thunder.

David: Next question would be yes since you took my second one. That was a really good answer though. Honestly. Big challenge Bob. Tell me a little bit about some of your hobbies. What is it that you like to do?

Shiloh: You know, I have different hobbies for different people like I love to go on dates with my wife. That’s fun. We like to go out to dinner and go to movie and have a great time with that. With my oldest two kids well my oldest daughter we went down to Costa Rica recently, I had a wonderful time. Beautiful, the food is great. We went zip lining. With my son, I love to go deep sea fishing with him. I don’t know if you guys have ever done deep-sea fishing, but it is a blast. Then my eight-year-old daughter we rollerblade to 7-Eleven and we get slurpies together.

Brandon: Nice.

Shiloh: That’s what we do. My three-year-old I like to build trains with him. Those are my hobbies.

Brandon: I went deep-sea fishing one time and my dad was out with a buddy of mine. We went out on the boat and we got out there and all of the sudden like the waves hit so hard and so terribly like I mean our boat was going like 30 feet-40 feet up in the air. I mean it was I died for like an hour. Like I remember just laying on the floor of the boat just puking, but not being able to like get up to do anything about it and they finally turned the boat around and it only ended up being a two hour tour instead of the whole day.

David: Five hour tour.

Brandon: That was the worst day of my life. Hands down.

Shiloh: That does sound like a true fishing story where everything gets embellished just a bit.

Brandon: Oh no, oh no it was that bad. It was so bad I passed out I was so sick. I mean I just passed out and it was the worst experience of my life. Oh man. Anyway okay moving on. What do you think sets apart successful real estate investors from all of those who give up. They fail or they just plain never get started?

Shiloh: You know that’s a good question. I think that you know we talked about the cash flow quadrants. We talked about the different mindsets. I think that it does have a lot to do with mindset. The employee mindset is very much about safety and security.

They want to make sure you know I go to work. I get my 9-to-5. I get my you know paycheck and I feel secure with that. That does make me feel insecure because whenever I’m working for somebody else at any moment they can decide you know this isn’t working out and then they can fire me. I feel a lot more secure when I’m working for myself than someone else.

I think that’s a big part of it is it’s the mindset. The willingness to take risks and so at the beginning when you partner up with somebody who’s been doing it it’s a lot easier to take those risks because you don’t feel like oh no I’m investing all of this money. I can lose it all.

When you partner up with somebody who knows what they’re doing at a kind of a limited amount it’s not as risky. You know what I mean? Somebody already knows what they’re doing.

Brandon: Yes.

Shiloh: Definitely this is one thing I do want to say. You definitely need to vet the people that you partner with. In 2016, I partnered with somebody else up in Phoenix on two deals. They went very very poorly and I lost about 70,000 between the two deals. I learned a lot from partnering with that person about what to do and what not to do when it comes to partnerships.

Brandon: Wow.

David: Yes.

Brandon: Ouch. Any pieces of wisdom there on what not to do?

Shiloh: Yes so definitely vet the person. One of the red flags came to me when he went and showed me one of his properties I’m like oh this is awesome. Do you have any offers on them yet? He’s like no well how long has it been on the market? It’s been on about 10 months.

We did just get an offer though and my thought was huh it’s been on the market for a long time and it’s a high priced property. I was just really excited. Again I was still pretty new and so that wasn’t as big of a red flag as it should’ve been and then I was asking about all of these little things that didn’t look like they were fully fixed. He’s like you know what that’s fine. That’s fine, but they were higher priced properties and then the higher priced properties those little fixes are not fine.

You need to make sure that those properties are done well. Then I didn’t read his contract nearly well enough to know if this deal goes bad what happens? You should definitely read the contract well.

Vet the person. Talk with other people that they have invested with. If I had done any of those things I likely wouldn’t have invested with him and I would be $70,000 richer.

Brandon: There you go.

David: Brandon and I had an attorney on the podcasts that was talking. We were basically talking to him about you know making sure that your forms that you have for your tenants are rock solid and one of the things that came up was that you can go to an attorney and say, “Hey can I pay you for an hour of your time. Read this contract and tell me what you think?”

You know because the reason most people don’t read contracts is not that they don’t think it’s important is that they don’t understand what they’re looking at and they don’t like feeling stupid so they just don’t read it right. It’s kind of like reading a language you to understand. Well go take it to the person that speaks that language and pay them to read it for you and say I want bullet points of exactly what these things mean and if you hear something that doesn’t sound right well then you can bring it to the person and just that really small investment of your time, and a little bit of money would you know save people a lot of money so that’s a valuable lesson that you’re sharing. Thank you for that, Shiloh.

Shiloh: Absolutely.

Brandon: Alright.

David: Last question where can people find out more about you?

Shiloh: Good question so I’m you know I’m doing lots of different things here and there I have a website BlueEquities.com and on that website you know we highlight some of the rehabs that we’ve done so people can kind of see the workmanship of some of our rehabs. I am putting up some more information about lease options on there. That’s one way. They can Google me.

I have stuff on Google about me. I have different what do you call it? You know educational videos when it comes to therapy and parenting. It’s one of the things that I do is I teach parenting classes.

Brandon: Oh nice.

Shiloh: Out in Mesa and I’ve been doing that for years and years and that’s been a great thing. I also have an app that I’ve developed that helps individuals struggling with addiction overcome addiction. Again, I just I have a lot of different things. You can Google me. If you can come to the different websites that I have and I guess that’s how to get to know me a little bit more. You can send me an email through my websites.

Brandon: Cool.

Shiloh: That’s how you get to know me.

Brandon: Alright good deal and of course you’re on BiggerPockets. I’ve seen you around so.

Shiloh: I’m on BiggerPockets.

Brandon: We’ll make sure we link to your profile there at—on the show notes at BiggerPockets.com/Show287.

Shiloh: Awesome.

Brandon: Without Shiloh we got to get out of here. Thanks for coming on the show today it has been fantastic. I love your story I love your journey. You got some creative finance stuff going on. I love that. Keep it up.

Shiloh: Thanks man and thanks for letting me come on the podcast with you guys, this was great.

Brandon: Yes, thank you. Adios. Alrighty, that was our show with Shiloh Lundahl. I sure I’m saying his last name right. Lundahl. I think so. What do you think?

David: Well he has such a cool first name that no one’s really going to pay attention to his last name.

Brandon: I know that’s the part where I kept saying like Shiloh.

David: Yes.

Brandon: Doesn’t that mean peace? I think that means peace or something.

David: I think that’s Shalom.

Brandon: Oh.

David: Maybe in a different version of it though.

Brandon: Maybe.

David: It could be Shiloh.

Brandon: Yes, maybe I don’t know. Maybe I’m just butchering my Jewish language skills. Anyway, yes fantastic show. I love people who do like creative finance. I mean I love all people, but I have a special place in my heart for people who figure out how to put together deals using multiple different creative strategies. Like because you know it’s very seldom that one strategy works across the board right. He combines different things. Yes, I like that.

David: Well we’ve all got access to the same recipes, but what makes a chef a chef is their ability to combine them into something that works. Right so if you’re sitting there complaining that real estate is too hard or you can’t make it work maybe you’re not combining the ingredients in the way that works and you need to look at yourself and ask yourself how you can improve as a chef.

Brandon: Wow. David analogy Green. Coming in and strong. I agree though, but he had a lot of ingredients in his soup so that was.

David: That was that’s a good point.

Brandon: Yes, it was good so anyway. Well I hope you guys enjoy the show today. We got to get out of here, but thank you for being a part of BiggerPockets. Make sure you guys subscribe to the show wherever you’re watching it and leave us some ratings and reviews because that helps more people hear about the show. You want to take us out?

David: That’s what we’re here to do or Brandon’s sleeps in his car Turner. This David Green signing off.

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In This Episode We Cover:

  • How Shiloh started his real estate investing journey
  • The book that helped him heal
  • Details about his first property
  • Office hacking and subleasing a sublease
  • His first flipping deal — $30K turned to $195K
  • How he bought his dream car
  • Losing $5K on his first flip
  • A hack with city inspectors
  • The importance of needing an assistant
  • The six different strategies he uses creatively
  • Moving to a lease-option model
  • Getting $800K in business lines of credit
  • Lease options and how he uses them
  • Selling properties 5–7 percent higher than the current ARV
  • Explaining lease option through videos
  • And SO much more!

Links from the Show

Books Mentioned in this Show

Fire Round Questions

Tweetable Topics:

Connect with Shiloh

About Author

Thanks for checking out the BiggerPockets Real Estate Investing & Wealth Building Podcast. Hosts Joshua Dorkin & Brandon Turner strive to bring top-notch educational content and interviews to our listeners — without the non-stop pitch prevalent around the industry.

With over 180,000 listeners per show, the BiggerPockets Podcast has become the biggest real estate podcast in the world. But don’t take our word for it. We’re the top-rated and reviewed real estate show on iTunes — check it out, read the reviews on iTunes, and get busy listening and learning!

10 Comments

    • Shiloh Lundahl

      No. Because if the Dodd Frank act that requires certain things when creating a mortgage, if you don’t follow those guidelines then you can get exorbitant fees. So even though it would not be a mortgage, if it looked like one, then we could get huge fines. It isn’t worth the risk. So we tell the tenants that because of how the law is right now, we are not able to do any credit backs to the tenants. They seem to understand.

  1. Andrew Jurinka

    In my opinion this strategy has a decent amount of risk. The upside is good but the downside could be bad. Specifically the number of properties that are at full leverage (as an investment, I’m assuming it’s 75/25 LTV) that are cash flowing $100-$200 per month and based on a number of assumptions. If things go south in the market and vacancies pick up, prices drop, financing costs increase, you could see your cashflow situation turn. In turn all of these future gains disappear AND you’ve got lots of homes on your hands.

    The risks can be mitigated with decent cash reserves (say six months per house), but there was no talk about that in the podcast.

    Some things to consider that a conservative take on this should account for:
    * Vacancy expense
    * Maintenance expense (and yes, CapEx. Replacing carpet after a tenant with a cat and dog ruin it would be $2-3000K)
    * Longer-term financing to ride out the squeeze of having to refinance (I believe the author had 5 year terms)

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