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Conquering Nightmare Rehabs While Working Full-Time with BRRRR Investor James Masotti

Conquering Nightmare Rehabs While Working Full-Time with BRRRR Investor James Masotti


Excited about real estate investing and looking for a blueprint to follow? Well, you’re in luck!

Today’s guest James Masotti is a well-rounded investor who’s piling up properties while working a full-time job.

James shares how he consistently finds deals in a competitive market (it’s not through the MLS), how he funds these deals (it’s not with his money), and how he handles the common complications every investor faces.

He also gives some great advice for acquiring properties already occupied by tenants, and explains how he keeps his partner and lenders happy even when things don’t go according to plan. He offers tips on planning for CapEx and dealing with the dark side of real estate investing, too. 

Plus, you won’t want to miss his advice when it comes to building funnels to find deals, as well as just what to look for when interviewing real estate agents.

James has a straightforward, no-nonsense approaching to succeeding in today’s market and provides tons of good content for how you can do the same! Download this episode today!

This is the BiggerPockets podcast show 312.

‘Again, you have to be flexible to kind of figure it out, right? Then what did you learn from it? The mistakes are going to happen and if you just sit there and analysis-paralysis, you are never going to get through it but just trying to be able to say, ‘You know what? Okay, how do I get to the next step? How do I get to the next step? How do I get to the next step?’ Rather than either shutting down or just thinking, well, now I cannot get the 400 units.’

You are listening to a BiggerPockets Radio, simplifying real estate for investors large and small. If you are here looking to learn about real estate investing without all the hype, you are 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, host of the BiggerPockets podcast. Here with today’s awesome, incredible, handsome co- host, Mr. David Greene. How are you doing, Handsome David?

David: Thank you, Brandon. First Time you have ever said anything nice about me actually.

Brando: Yes, this is a great look on your face that whole time.

David: Quizzical, like why is he saying this? Where is the insult going to come from? I am actually doing super good. We put six houses under contract this week on the David Greene team. Almost all people that are looking to house hack. As everyone knows, the bay area are super expensive right now. People come to me and say, ‘David, I want to buy a house out here but it is expensive.’ We find ways to get them properties where they can rent out rooms, rent out parts of the home, bring their costs way down and then when you factor in like the tax benefits and the principal pay down, they are pretty much living for free.

I just want to say house hacking is a real legit thing. It is not just some concept that gets thrown around on BiggerPockets. There is people living in really expensive areas. Getting homes are going to be appreciating a ton and not paying that much money when you do this right.

Brandon: It is brilliant. It is pretty much exactly what I am doing right now. It is amazing. Awesome, awesome. Yes, I love it. Alright, well, let us get to today’s show. I will introduce today’s guest today. We are talking with the guy who is all over the BiggerPockets forum. His name is James Masotti, right? Yes, the hand thing. He invests out in Delaware. Lived on the east coast, invest in Delaware. Works a full time job. We are going to talk about how he does that, how does he do it while working a full time job?

He has got some really good tips there and then he has a few horror stories, we will call them, about real estate and things that you can learn. You can learn from your own mistakes or you can learn from other people’s, I do not want to call them mistakes, but their problems, the horror things that they go through, right? Because real estate is not always easy and James is really open and honest about the hard times as well as the good time. You are going to love it how he uses private money, how we BRRRRs, how he does deals with no money down, but he has a really good point about how no money does not mean broke, listen for that. Again, that is today’s show, you are going to love it. But before we bring in James, let us get to today’s Quick Tip.

David: Quick Tip.

Brandon: Alright, today’s Quick Tip is very very short. I mentioned this a couple weeks ago. We have a spot on the show, a spot on the website, called Deal Diaries. Basically, we want everybody who is a BiggerPockets member, we would love you to start telling other people about your deals, right? Because it helps you stand out as somebody who is actually doing it. If you have done a deal recently, go into your BiggerPockets profile and you can look for the section that says Deal Diaries. You can upload information about your deal just like James does today and telling us all about his deals. You can do the same thing without being on the show. Of course, if you want to be on the show at some point, if you have done a dozen deals or more, go to BiggerPockets.com/guest and maybe you will get on the show as well. Now, before bringing James, let us hear from today’s show sponsor.

David: Okay. Today’s support comes from Fundrise. Look, if you are listening to the podcast, you probably already know how tough it is to find truly exceptional real estate projects. You have also probably felt the pain of finding one of those projects but not having enough capital to get the deal done. That is where Fundrise comes in. Fundrise enables you to invest in high quality, high potential, private market real estate projects. Like I am talking to anything from high rises in DC to multifamily properties in LA, institutional quality stuff.

Each project is carefully vetted and actively managed by Fundrise’s team of real estate pros. They are high tech, low cost online platform lets you track the progress of every single project and keep more of the money you make. By the way, you do not have to be accredited either. I am telling you, Fundrise really does feel like the future of real estate investing. Visit Fundrise.com/BiggerPockets to have your first three months of fees waived. That is Fundrise.com/BiggerPockets.

Brandon: Alright, big things from today’s sponsor as always. Now, let us bring in James to get to the interview because you guys are going to learn and grow a ton from James’ honesty. Let us get to it.  Alright, James. Welcome to the BiggerPockets podcast. How are you doing?

James: I am doing great. How are you guys doing today?

Brandon: I am pretty fantastic. I got to point out something first before we get started. I discovered that you lived in like my town apparently. What is the town name, Turnersville?

James: That is right, yes, I lived in Turnersville.

Brandon: I thought that was a joke and then I asked you and you said no.

James: It is not a joke. Yes, we got a local BiggerPockets meet up we have been doing this past year. If Brandon Turner ever wants to come out to Turnersville…

Brandon: Yes, that would be pretty cool.

James: They have to happen someday.

David: There you go.

Brandon: There is a lot of like Greensville and Greensland and then green stuff but I always like first Turnersville.

James: I am clearly more influential and famous than you are but I am glad you finally got your first little city. I mean that is a big step for you, Brandon, congratulations.

Brandon: Thanks, man.

James: Although you have to actually be Italian. Your last name has to end with a vowel to live here.

Brandon: Turnio.

David: He is not good at that. Yes, we had this problem with say, [inaudible][05:34], remember that, Brandon?

Brandon: Yes. Tell me how to say your last name?

James: Masotti.

Brandon: Masotti, okay.

James: Yes.

Brandon: Do I say like Masotti?

James: Exactly, exactly. A lot of people kind of get it messed up. They say Masotti like Maserati. I am like, no, it is Masotti like Maserati because everybody says the car name wrong.

David: Oh really?

James: Yes, it is Maserati.

Brandon: We have world changing the way they pronounce the car as opposed to changing the way you…

David: That is the bust through right there.

Brandon: Alright. We are here to talk about real estate investing of course today. Why do not we jump into that? Like how did you get into real estate? What was your like entrance into it and then walk us through that process of getting your first deal?

James: Yes. My entrance into real estate was I always felt like paying rent which is throwing money away. When I graduated college, I actually was looking for a place to live and decided, ‘You know what, for what I am paying for rent, I could just try and buy my own place.’ I came across a VA foreclosure back in 2008 so lots of stuff foreclosing back then, but the VA foreclosure was a zero down for owner occupants and the place was kind of a mess.

Basically moved in, bought that, and then over like next year and a half, started fixing it up. Then my company relocated me to California and I started renting it out and I will have the same tenant for nine years now when she renews this year. That was kind of how I got started. Then back in 2015, I had a co-worker start working with me and he talked about real estate investing and that was kind of when I decided I should probably get more active in doing this and that is when I found BiggerPockets and it is kind of been downhill from there.

Brandon: Alright. Though, hopefully uphill.

James: Uphill.

Brandon: It depends on which way you it will get. Uphill would be a battle, downhill is a… If you say like you mean it is all downhill from here. It sounds, I do not know, alright we are going to keep going. Alright, you live in Turnersville, New Jersey now. You apparently moved away from California. You made it over to New Jersey at some point, I am sorry.

James: No, when you marry a Jersey girl and she says you are moving to New Jersey, that is just the way it works.

Brandon: Yes, that happens. Alright, you are in New Jersey and you still work full time at your job I hear?

James: I do, yes.

Brandon: Well, you cannot invest in real estate and work full time at your job so you are clearly wrong.

James: No.

Brandon: Okay.

James: Yes, I mean I did actually. I did make a change in employment back in February so it is definitely was more challenging. My past employer, I was working five to six days a week, 14 hour days and the opposite direction of my market. Again, where I live in South jersey, about half hour outside of Philly, actually all my rental properties are down to Wilmington, Delaware. Technically out of state but it is only about a 40 minute drive from where I live. But where I was working at the time was an hour at the opposite direction so it will take me like two hours and after a 14 hour day, like I did not want to be going to do that. I kind of made a transition so I had a little more time and flexibility and that sort of a thing.

Brandon: Well, I want to actually bring something up here. A lot of people look at they want to get into real estate investing and they think that they need to quit their job or they just cannot invest because they work too many hours. But David and I actually both talked about this a lot. A person could find another job instead like even if it paid way less, right. Even if it was not their ideal job. If you want to get into real estate investing and you are working 70 to 80 hours a week because you got some crap job, it is okay to go find something that is more flexible.

James: Exactly. That is exactly what I did or something. I took you to a decent paycheck, a pay cut. I still make okay money and things like that to support life and what not but I was very clear when I was going in there. What I was looking for in my professional life but that I was doing this investing thing on the side and needed to be able to have flexibility to leave work early to come in and do this podcast today or go to a closing like I did last week and things along those lines.

Brandon: Yes, that is crazy. Awesome. Alright, let us move into your first deal locally. First of all, how did you find Wilmington, Delaware from New Jersey? Like why did you choose that market and then walk us through your first deal there?

James: Yes. When I again was looking to buy my first place, I was working in Delaware County which is actually in Pennsylvania and my parents lived in another county and I was kind of looking where locally and again just happened to find this house in Delaware. Then in 2015 when I was starting to look to invest, I was looking locally here in South Jersey and the taxes here in Jersey are absolutely insane. Like for my townhouse that I lived in, and this when I am on my rentals, I was paying about $1,200 a year for property taxes. My townhouse here in Jersey is $5,400 a year for taxes. Trying to get things to cash flow and stuff like that was a pain.

Then at that point in time, I was not really into cash buying position so trying to find flips on the MLS was difficult. Then my first one I called true investment was actually on the BiggerPockets marketplace. There was a deal listed from an agent with an off market kind of listing and ended up kind of going to walking it and use my first private investor on that place and it was kind of a disaster but I learned so much during that project. That was one of those, again, never wished that first one on everybody but I am so happy I did it because it got me to where I am too.

Brandon: Sure. What made it a disaster? You found the deal on BiggerPockets or somebody had advertised on our marketplace, for those who do not know there is a part of BiggerPockets called the BiggerPockets marketplace. It is actually getting re-done right now and I think by the time this podcast airs, it will have a whole new thing. It is like completely being re-designed. But anyway, it is a place people can go and post ads for properties that they have, properties that they want, properties that they are potential partners or bank suggestions, whatever. Anyway, that is what we are talking about. You went there, you got something, what went wrong on it. What was it and then what went wrong? It was a single family, right?

James: It is a single family townhouse. It had three bed, one bath. Basically, it was my first time going and going and doing all that sort of stuff. Yes, I went in, they were marketing it. It only needs $12,000, they already had an appraisal done but the person who doing the renovations right now the money so they were trying to sell it fast. I walked it, I thought I knew what I was doing because I read J. Scott’s book and all that kind of fun stuff but I never actually had a contractor walk it.

Needless to say, I went from a $12,000 budget on there and I was like this is going to be more than that. It is going to be like $18,000 or $20,000. Turned out to be $65,000. Yes, we had to rebuild literally the whole back of the house. We literally had to take the whole backside of the house down. There was a secondary foundation supporting the back of the house that has started to cave in. We had to take the wall off to support it and then it rained for an entire month so I had the whole back of my house tarped up with like plywood, they could not any electrical or anything. They said it is just timeline scope. It was my first experience with a contractor stealing from me. Again, it was just so many different little things in that deal that was just quite the learning experience.

David: Wow.

Brandon: Yes. Okay, I get this email from a guy the other day and this guy says a similar story actually. I will not say his name, and if you are listening, dude, I feel for you. But he basically says, ‘Look, I took all of my savings that was for my kids’ college education and I dumped it into a real estate deal. My budget of $15,000 looks like more like,’ or maybe it was 30, ‘now it looks like more like 60, right? He is like, I feel like I lost my kid’s education. I just want to throw in the towel, I am done.’ It was a very very similar story of this. My answer to him, I am curious of what you would say to him being that you were in this exact position.

I told him basically what we have said on the show here before is that the first deal, it matters in that you are gaining knowledge and experience. By the end of the day, it does not matter that much. Like one deal is on making you rich are making you poor typically so do not throw in the towel, right? Like take the lessons you learned. I mean that was the first piece of advice I gave them. The second piece of advice I gave him is, look, if he is having contractor problems, he is only spent like 17 grand so far, I said maybe, I do not want to call it a punishment to yourself and I think, David, you disagree with me on this point but I said maybe, the way you say… ‘Okay, well I screwed up. The way I am going to fix this is by spending every night and weekend doing all the things that I can do on the property to earn back that money that I just lost. I am going to go and do the painting myself. I am going to go do everything little that I can do to cut that budget from the 60 now that I am thinking back down to 30.’

Then the third thing I told them was just hang in there, again, because like if you take the knowledge, you take to experience, real estate is very forgiving, right? Very forgiving. Like you could go over $30,000, $40,000, $50,000 grand on your budget and at some point in the future that does not actually matter because the property will likely appreciate far more than that. Now, I mean, it still sucks to go over that you should not go over it, but anyway, that was my response to him. Do you have anything you want to add to that or we will go James first and then I will ask David the same?

James: Yes. No, I mean the biggest thing that I… At this point, my investing, I mean we use private investors for pretty much everything but we still have that cash reserve and so I am a big proponent. If my business model is kind of a no money, our investors fund the acquisition and the rehabs and that was the case on that project. But again, that does not mean you do not have to come on extra. For me, it is also about keeping in mind just what are your resources on that deal, right? I mean I did have to take out a loan from my 401k to get it done.

I did open up a zero interest credit card. Like again, you have to be flexible to kind of figure it out, right? Then what did you learn from it? It is not so much again like the mistakes are going to happen and if you just sit there and analysis-paralysis, you are never going to get through it, but just trying to be able to say, ‘You know what? Okay, how do I get to the next step? How do we get to the next step? How do I get to the next step rather than either shutting down or just thinking, well, now I cannot get the 400 units like Mr. Sterling did on this week’s podcast.

David: Yes.

Brandon: Yes, crazy. Okay. David, what would you say in that same kind of situation?

David: Well, you are going to make those mistakes. First off, if you beat yourself up because you go over budget and you think that means you are not good at this, that does not help you at all. It does not serve your purposes. That is the first thing I would say is like you should go in expecting to make mistakes so that you do not beat yourself up. You should not be making that same mistake three, four, five, six times in a row. Then you might be, well, should I really be in a real estate investor because obviously there is something about you that is not adapting to the circumstances, right?

The second thing I would say is if you do go over budget which is going to happen, do not assume like Brandon was saying, that you have to jump in there and make up the difference yourself. If you are a skilled labor and you know this stuff really good and you do not really have any other options as far as making money, well then yes, that is a great decision for you, right? But let us say you are me when I am working as a police officer and I know I could just go stack up over time and I could get time and a half money, right? I might actually lose money taking my time out of being a police officer and going onto the job and everyone’s different which is why we cannot answer this question the same for every person, right? Because my opportunities might not be the same as yours.

You might be an insurance salesman who is super talented and you could go make $50,000 in a month because you really applied yourself and you would have been saving $30,000 over two months was actually a bad call or you might be someone without those options and so yes, you got go get your hands dirty. But look at it from that perspective, what is the best use of my time? If you buy a deal and you go over budget and you lose money on it, that does not necessarily mean it is a loss, right? Like I think I use Brandon’s example all the time. The first house you flipped. Was it your first one, Brandon? That weird one that you never should have flipped? It was like very unusual, really big…

Brandon: Yes, exactly. That was like my third flip basically.

David: Okay. You lost money on that deal but what you learned on it enabled you to make money on your next ten, right? If you made just $10,000 over the next ten deals and what you learned in that deal made you a $100,000, so that is a win still and you just have to kind of take that overall perspective.

James: I think the other big thing too, my business partner and I were actually just talking about this the other day on the phone because this is only the first example of many like it that we have actually had in our investing in and it goes back to the Annie Duke podcast where she talks about there is such a thing as making the right decision and just getting unlucky on the outcome versus taking a gamble and getting lucky and which one is actually better. It is also that kind of situation, did you analyze it right? Did you make the right decision going in? You just had an unlucky set of circumstances and then how do you learn from that? I think that is the other big takeaway that I am trying to go through even in our current state that we are at.

David: You mentioned a minute ago, James, that the deal you were buying, there was no money involved but that does not necessarily mean you do not have any money. Can you maybe break down a little bit what the dichotomy is between no money investing and actually being broke?

James: Yes. I mean the difference right with no money is you are trying to leverage your time and your skills in order to kind of be able to get more deals but you have to be able to recognize that there is other things that are unanticipated that can come up and if you have no way to react and respond to those, that is when you kind of start getting into challenging situations. We had one property that it ended up sitting vacant for a year and we actually had to pay off the investor because the note came due, right? It is like that was not something that we were anticipating and you have to kind of, but you know it could happen, so as you are looking to evaluate deals and analyze deals, how far do you stretch? How much risk are you willing to take? A lot of times it is just that balance of okay, yes, we do not have any money into this but what are the potential things that can happen and how do you make sure you do it in a reasonable and responsible way?

David: Yes, I love that. I make that point several times throughout that. The very first book I wrote, the Book on Investing In Real Estate with No (and Low) Money Down is that investing with no and low money down is not about having no money. Like most of the best investors I know do not use their own money when they put together a deal. Oftentimes they use none of their own money, right? Even the rehab stuff. But it does not mean they do not have money.

James: Right.

David: James, do you have a recommendation? I made a rule of thumb that you follow on how much somebody have in reserves when they buy a real estate? Like call it a rental property. I know a lot of debate there.

James: Yes. I think again, it depends on what you… You asked me this question six months ago, it would have been a totally different answer because I thought we had way…

We had plenty in reserves and basically what ended up happening is we were going through a refi, we came in 25% lower than what we were expecting. Then we went into a flip where we ended up deciding to use a bank financing. Like a convention or a traditional construction loan so we had to bring some money into the table as part of that. Then on this flip, our original budget was 120, which the bank was financing on the renovations, were at 160 now. It is like not only did I get hosed on my refi going right into this flip, but now coming out of that, I have got these. I got two rental properties go vacant, one of which was vandalized all throughout this process. Where I thought I had plenty of reserves, again, just series of one thing after the next, after the next, has been piling up.

I would say, when you are looking to scale, especially if you want to scale quickly, you probably need to have reserves available significantly larger than what you think you really need. If the bank tells you you only need five grand in the bank or something like that, what happens when you do have to go in and replace a whole bunch of stuff because that could happen.

Brandon: Yes.

David: James, let us take a step back here. Can you give us kind of an overall view of what you are investing in, how many units you have, what your strategy is and then we will kind of break it down from there.

James: Sure, yes. Right now, I have 15 properties and then the flip that we have ongoing, we just got it listed. Right now, the breakdowns basically five of those were kind of the BRRRR strategy, seven are turnkey that we bought from other investors that were selling off their portfolio. We have one that we did a commercial lease back on and then the day after Christmas we are closing on, we are under contract to close on five more properties including our first mixed use and our first duple so I had eight more units before the end of the year to get me up to 23.

Brandon: That is awesome.

David: Okay.

Brandon: I want to dive into those in a minute but first of all I am wondering how are you finding these deals? I mean like they are kind of a variety. You have done a number of different things. You got to use out the commercial lease back, you got the mixed use, you have got like… What are you doing to find these deals?

James: Yes, the majority of them have actually come through I have, I am a little biased, but I think one of the best agents out there definitely at least in my market. He has actually got a really interesting story. He started out as a commercial appraiser and then became a residential agent and then get rid of his commercial appraisal license and then became a commercial broker. He has a lot of connections with the overall investor community in the Wilmington area and almost all the deals we have done have been off market pocket listings and things like that that he has had other investors other people bring to him and he knows kind of my style and so he brings it to me and he says, ‘Can you do this?’ I go, yes.

That is how we have got a lot of them. We have done like one with a wholesaler. I think one was off the MLS but, yes, I mean it is a little bit… One of the things we talk about time is we do not really truly have like a funnel where we are doing marketing and all these different kinds of things and we have some things we are looking at when we eventually stabilize our business or how do we kind of bring in that funnel and that stable pipeline but our growth has been I call somewhat organic and that we have just been taking the deals as they come to us.

David: But you do have a funnel but you are not the one who put the funnel together. Like what you did was hijack that realtors funnel or your broker’s funnel, right, and just plugged yourself right in which is even better than having your own funnel if you really think about it. If you get two, three, four people with their own funnels and you are just jumping in at the very end of it when the deals come your way. Well, that is your funnel that you kind of made. I will let Brandon jump in here because he is the funnel master. We should come up with some nickname for him like #funnelmaster.

Brandon: Funnelmaster.

David: Yes. He has to walk around always like looking through like a featuring funnel.

Brandon: I got nothing. No, I will say this, I say this all the time and I will say it again here that every real estate investor in the world has the same funnel. We all have the exact same funnel. You get leads, you analyze them somehow. People have different ways of doing it if they only get leads. You get leads, you analyze them, you pursue them, LAP and then sometimes you get success which is S, right? It is LAPS, everyone follows that. Your funnel, you might have numerous ways of getting leads. It sounds like you have got a variety of ways but a lot of it is centered around that broker who is helping you get it.

Like David said, you just totally a hijacked that which is awesome. Then you run the numbers, I am assuming, you figure out whether it is worth to do it. You go after some of them and sometimes they work and sometimes do not. There are like how often do you get rejected when you make offers like or you are pretty successful and you only go up to the ones that you are sure you are going to get?

James: I would say, I mean, we are generally pretty successful actually. Again, it is one of those we have been working with my broker now for three years so he understands our business model and how we do things. It is really like he will bring it to me when he knows that there is going to be a fit and when the particular seller is in the right position, right? To sell on our terms. Where we have had stuff all out, we had one who we are under contract on earlier this year for five properties but the seller had not seen the properties in five years and like there was a squatter in one and all kinds of stuff. Like we were originally under contract, we went back and asked for $150,000 price adjustment on the portfolio and they were like we cannot sell that cheap.

It is like go look at your properties like you either need to put the money in or you are going to take that price in. They are just not ready yet. When the time comes and they are, hopefully, we will be able to step in and our offer still good to buy those but that is when we seem to see things that are investor is not really necessarily in tune with what they want to do because we do not try and low ball people and get things cheap, right?  I mean here is how our numbers work and that is what the offer is and we usually make it work.

Brandon: Yes, I love that how non-emotional that is, right? Real estate is kind of an emotional thing, we get involved but the more you can stick to your numbers of this is just what it says and hey we found something in inspection, now our numbers is this.

James: Right.

Brandon: It is what it is. This is an emotional game, right?

James: Yes.

Brandon: So many and especially new investors, this gets so, and I get it, but they get so involved with it because they just want a deal and they get emotion. Anyway, yes, I think that is huge. Let us move on. You got these properties, there are some residential in there, there are commercial. Well, you said least, the commercial lease back, can you explain what that is?

James: Yes, it was actually pretty interesting. This particular deal was they own their office building and they own four row homes behind it where it was. The very first one connected to their office building, they had to expand and so they actually converted it into office space and so they were trying to market their office building with the other four units but their office they were asking too much for it. It was too nice, we did not need the space and things like that, but we wanted the other four and so basically as part of the negotiation like we have not sold the other building, we need to stay there, so they signed a two year lease to stay in the unit. Immediately upon closing it, we basically signed a lease as part of the closing documents. At the closing table I got my security deposit and every month there is a check in the mail.

David: That is awesome.

Brandon: Can you tell me, James, like you said you are getting most of these deals from a broker. Can you tell me what does your average deal look like and then from there we will break down like how you are funding it, how you are finding it, that kind of stuff?

James: Again, we have actually been getting like kind of a little bit bigger with each transaction. Our average deal has like an ARV of somewhere between 85 and 115. Basically, our criteria is what my bank’s criteria are which I need to pick it up for about 70 percent of the ARV because I can re-finance up to 75% but I have obviously got some holding costs and things like that that are packed in there and then I got to be able to have a debt coverage of 12 to 125. That is basically my criteria. It is like, hey, if they are offering it in a place where we see we can negotiate to there, then we are generally pretty good. Then as far as how we are doing it because they are all individual single family so we will bring our investors in. It is just a straight single mortgage and note with that private investor, there is no syndication or anything along those lines involved with how we are structuring the financing piece.

David: Before we dig in, can you explain what the debt coverage ratio is that you just described for people who do not know?

James: Yes. Basically there is the net operating income on the property which basically says here are your income from the property. Here is all the of your projected expenses. Now, I have learned banks calculated differently than the way I would calculate it so it is hard sometimes to know exactly what they are putting in there but you basically get to your net operating income and then once they figure out what your debt obligation would be based on the rate and term and things along those lines, as long as your cash flow is coming in is 20 to 25% greater than that debt payment than they would consider that you have enough cushion in there to generate your reserves and cash flow to support the property.

Brandon: Nice.

David: The debt service coverage ratio also called DSCR of 1.2 would mean that you are generating 120% of what it cost to run the property basically, right? That is a metric that banks look at because they want to know that you are going to have enough cash flow to pay them back. Very good point, thank you for sharing that.

Brandon: Yes, very good. If people have questions about things like that, if you go… I just want to actually call this out here, if you will listen to the show right now, if you are listening and you are driving whatever. Like there is terms like that you do not know. I mean we are going to try to explain them on the show and we do try to pull those out but often times we just do not or we do not think about it ever but there is this amazing website out there called BiggerPockets.com and it is totally free to go there and search for like DSCR or whatever, right?

There is a little magnifying glass and navigation bar, jump in there, search for the terms there and there right there. You can also go to the show notes anytime like if we are doing a show like BiggerPockets.com/show312. You can go to the show notes and then right there we will put links to articles about it, we kind of throw in those things as well. Again, do not like just to go I do not know what that is. I am going to turn off my brain, like use that as an opportunity to grow. Moving on, I want to go back actually… I should say moving on but moving back, we are going back to the future. Am I right in assuming that you are basically burying these like you are buying them with private money, the single family houses, then re-financing them later? Is that your strategy?

James: Yes, exactly. Again, some of them have their vacant and they have work that needs to be done so I just want to call it really the true BRRRR but we are kind of doing the same thing even with what I would call these turnkey property. When I say turnkey, we are not buying them from a turnkey company or something like that, but we are buying them with tenants already in place and my commercial lender does not have a seasoning requirement and they view the private Malone as if it were a cash transaction and so we can buy it cash with our private lenders money and then as soon as the deed is recorded, I can start the refinance process with them and cash our investors out if we need to.

David: Can you tell us how you found a lender that would do something like that?

James: I called probably 40 or so different lenders. I have got… We have… I have been slowly building out a Podio database of all these different, insurance lenders, private lenders, the properties, building all kinds of different stuff. I am a technology spreadsheet nerd and really just kind of every single credit union, local bank, and basically anybody I could find that seemed like they had commercial lending and I said this is what I want, this is what I need, can you do it? The majority of them said, ‘No, you cannot get that. I was like, ‘Yes, you can. I am going to find.’ I just kept on calling and calling and calling until I found them.

David: You put together a system of systemizing different lenders in a CRM. Brandon, can we think of a name for what he is doing here? How he is taking a whole bunch of things and he is narrowing it down to get the answer he wants. But what do we call that?

Brandon: I will let you come up with it. I suppose it would be a form of a funnel, right? But see, that is the answer, right? That is why I wanted to jump in with this because it is very often in any business endeavor or any life endeavor that you want a result that you cannot get and then you get frustration, right? Frustrations, interference with the desired goal, and oftentimes we let frustration causes us to quit. While this was harder than I thought, or it did not come as easy as I thought,

I cannot find the lender that James has. It must be easy to be James. He has got this letter that will let him look at this transaction like it is cash, right? But you had to work to find that lender. You had to find 40 different people and call all of them, right? You turn your frustration into a plan, you took action on that plan. You broke it down, you found the lender. Now, it is kind of easy for you. You only had to do that one time and you can keep going back to that same well over and over and that is really the secret to what makes somebody successful with this and does not is… This is a puzzle, you have got to put together, all these little pieces to make it work and everyone’s puzzles different so we cannot give you the same answer to every person but we can give you the same techniques that everybody uses to solve their puzzle.

Brandon is really really good at articulating this and explaining it. If you guys are not on the BiggerPockets webinars, you need to jump on there. Like every week he is going through different puzzles and how he solves them using these principles that we talked about. I just want to encourage people when you get stuck and you are frustrated, put together the system, the funnel, get your answer, and then you are like, well, this is easy because you have done this several times, James. you have got one funnel that led to finding the vendor. You got another funnel that led to finding private money so now you get people to fund these deals and you have a funnel where your broker, you have tapped into his and he is sending you deals. Those three things make your job easy. Now, the deals just come to you. You Fund them, you re-financed them, you are good.

Yes, except the funnel, I have got to figure out next is tenants because we have had a lot of vacancy problems. As we have talked about, systematizing and all that sort of stuff, the big focus going into next year is the tenant funnel, I guess you could say.

James: Yes.

Brandon: Yes, that is important. I mean like it is a funnel, right? Like you have leads, you get as many leads as possible potential people. We had a guy on the show years ago. Maybe it was not a guy, I mean maybe it was not the show, maybe it was as a blog post. I cannot remember who it was. Anyway, what is that term like the World War One, the Blitzkrieg strategy for getting tenants and it was basically like they go out there and they post them like 30 different places and they put signs in yards and blah blah blah, right? Like the whole idea was get them in the funnel, then you are going to analyze the tenant, you are going to pursue some of them and some of them are going to be successful, right? It is all about getting more and more leads largely and finding ways to handle that. Anyway, my wife is like a pro at figuring out. Anyway, if you got it, you understand it and you get there. Let us talk about why you are having tenant problems, okay?

James: Yes.

Brandon: Most of the tenants that are coming in, you are probably inheriting them with the properties that you buy because you are getting it from a broker and he is getting it from someone who already owns it. Right? You are pinching off this great deal before it goes to the market, which is why you can find it. However, it comes with an inherent difficulty, right?

James: Yes. Some of the problems have been from inherited ones but a lot of them have also been from people that have been placed into them. Again, this kind of goes back to the, the Annie Duke of kind of like what are we doing wrong in this process? As we are looking at tenants that are in place, one of the things that we learned twice now, we have gone and we have purchased properties and had tenants move out the month we bought the property. The first one they claimed that they gave their notice and all this kind of stuff but nobody could find the paperwork and blah, blah blah and then the second one it was actually a section eight tenant lost their voucher the month and the mailing went out from the housing authority the week we had closing so I immediately had to start the five day letter and the eviction process for that.

Brandon: You bring up an interesting point here and I know this was not where we were going but I want to stress this. People often look at section eight. I hear a guaranteed income from the government, right?

James: Yes.

Brandon: But I have had several section eight tenants lose their voucher. You ask yourself why would a tenant do something to screw up getting free money?

James: Yes, I do not understand it.

Brandon: But they do, right? Like I had one tenant who they had to have an inspection once a year, she would not let the inspectors in because she assumed that they were government agents coming to attack her and so she lost her voucher. Like all of a sudden now you have a tenant who has zero chance of paying. I mean I am not saying do not do section eight, I actually kind of like section eight but they are it is not free guaranteed money.

James: I is funny because my contractor likes to say I define all of the odds and everything that he knows to be true with it. He has been investing himself for 15 years in the construction business because every one of my projects has way more problems than he has ever seen and then he is also going to the point his only evictions have ever been on non-section eight tenants so he is like trying to move all of his properties to try and gearing more towards section eight and I am like I have had bad experiences both ways so I was like I just need to figure out how to get better people in regardless of what their circumstances are and that is what we are trying to figure out how do we do that better job screening and I am actually just started re-reading the book on managing rental properties just because I am like I remember so many good nuggets in there. I am like I need to go back and revisit and start actually figuring out how we put these into a system and utilize them.

Brandon: Yes, property management really is, and thank you for that plug by the way, but probably imagine it really is a system. Like it is a thing, it is a business and it is hard.

James: Yes, they are crazy.

Brandon: There is a lot, there is a ton of stuff. If you want to learn that system, then great, learn that system. Otherwise, you need to find a property manager who is a rock star, who knows that system, right? Like David has a property manager that manages… He has multiple ones, right? I mostly do it in-house but the only reason I do it in house because we were willing to take the pain needed to learn how to do that where David was probably smarter and was just like I am just going to outsource it from the beginning.

David: We are lazy.

James: That is usually what I hear you say about David though, that he is smarter.

David: Yes, I am better.

Brandon: Always saying I am better looking and more talented.

David: Brandon is the guy that will spend three hours to put together an Ikea chair while we are in Hawaii. Like we could be watching a sunset. He is like, ‘But I saved $17 by doing it myself.’

Brandon: That is pretty much it.

James: It is also why he grows his beard longer, right? Do not have to trim it as often.

Brandon: Exactly. The more you work the more good you feel about yourself. That is why I am such a positive guy. Alright, so moving on. You got something, David?

David: I was going to move on too.

Brandon: Okay, well I am going to suggest one thing that I do. When I buy a property that I inherited tenant, I assume like I put it my numbers that I am going to have to evict that tenant, have a vacancy for three months. Like I almost always… Now, on like an apartment complex I do not do that because I do not want to assume I am going to lose all of them but I assume I am going to lose a few of them and probably a larger percentage than I would normally, right? Because I just know that in transition those things happen. There was this great Instagram discussion the other day. Who was it that did it? Rameet Sethi who was a author. He wrote a book called I Can Teach You To Be Rich, I think.

Anyway, he is like super anti real estate. But anyway, he had this discussion on there about getting tickets while driving. He said, ‘Getting a speeding ticket is not an unexpected expense. Yes, it comes at unexpected times but getting a speeding ticket is an expected thing that you will go through.’ Now these people were like maybe you just should not speed. But his point was like there are a ton of things that just go wrong, right? If you just plan for that in your budget, and I think the same thing applies to real estate this way, like we are learning this stuff all the time and I am kicking myself. I am doing some stuff like cont…

I mean rehabbing right now for the same thing. Like they are not unexpected, they just come at unexpected times, right? Like things like evictions, like they are going to happen. You can just plan for them. That is why in the calculators that we have in BiggerPockets, we have a spot for vacancy, a spot for cap x, a spot for repairs, a spot for all of that stuff because yes, they do not happen every month. You cannot plan on them but they do happen and so you have to plan for them and budget for them.

James: That is but the thing too, right? As you talked about the plan and budget for them but on that note, right? If you go on the forums, everybody talks about your standard percentages and things like that. We use a lot of those standards and I was hey our budget was going to be 10% vacancy rate. Well, I am running a 30% vacancy this year between non-paying tenants trying to get them to eviction and then how vacancies replacing people and then we are using a 20% cap X slash repair number. We know that when we walk these properties, they obviously had some deferred things that we knew we are going to have to do but we assumed we would have two or three or four years to accumulate cash flow to be able to do that. Well, I am running this year, I think it is going to end up being like a 60% expense ratio because where I was, not expensive, you are just on the rehab part of it.

David: Yes.

James: Yes, just because again, we had four units turnover that needed pretty significant work done. Again, it was not that we were not budgeting for it but this again goes back to the investing with no money. Again, if I had put all my money into all of this stuff, we would be in a really really tight spot right now with having to go and do all of these repairs that we need to have done.

Brandon :I love that you say that, I love that you are honest about that because I mean that is the truth, right? Like I have felt the same thing. Like a lot of times that my projections of properties are a whole lot better than what they actually are, especially the first year or two. Like because there is always those things and that is why, again, it is okay to invest using other people’s money but you should not do it broke because you are in trouble.

Now, that does not mean if you have no money, it does not mean you cannot do it. Just find a partner who has the money, the resources, to be able to backup those things, right? If you are like, well I am going to go down to the wire here, if this goes wrong, I am not going to have money for dinner. Find a partner who can give you dinner, you know what I mean? Like, so… Anyway, alright, very cool. I want to shift but I want to talk about one more thing before we get onto the deep dive and that is working a full time job because you do that.

James: Yes, I do. Do you have any tips or suggestions for those who are listening to the show that are like I really want to invest in real estate, I want to do exactly what James is doing but I am working full time. Any suggestions?

James: Yes, there is all the awesome exceptions of people that come on the podcast and they go crazy fast and all that sort of stuff but I think it is a matter of being honest with kind of what your circumstances and your situation are, right? Again, I think we have talked about these systems and processes and funnels, all that sort of stuff. When I bought my first deal off the BiggerPockets marketplace back in February of 2016, I did not have any of that in place. The problem is I think a lot of times people kind of like they see that end goal and they are like I got to get there, I got to do this thing, and they do not take the time to kind of realize what steps it takes to kind of do one at a time step by step and you will grow and you will learn all of that stuff as you go.

Again, one of the things that we learned this past year was we thought we could really start growing. By the time we closed on these ones after Christmas, we will have acquired 11 of our 23 units just in the last six months. But one of the things that we learned was, again, with all of these unexpected expenses and all that sort of stuff. We are like hey that is maybe too fast for where we need to be right now. We are actually, again, we are intentionally putting the brakes on going into the first part of 2019 to kind of level set and say, hey, we need to be in this for the long haul.

We cannot be shortsighted and just grow at any expense because you cannot keep bleeding money and expect that you are going to be able to be okay, so we need to be able to learn from that, figure it out. Okay, how do we maintain where we are? Again, thinking that you can go from zero to where I am now I think is where people kind of get stuck and caught up and you just have to take it one step at a time, one deal at a time and you will just naturally start to gain that momentum and grow to a point where you are comfortable and then you will be like, why did I think this was hard before? It just starts to become easier.

Brandon: Momentum, that is like the perfect word to describe it, that is what it is. It is like moving a train, right? It takes all the energy or getting a spaceship launched. Look at me, Brandon ‘Analogy’ Turner today. Alright, anyway, I love your story. I love that stuff. Where are you headed? I know you say you are slowing down a little bit. Where do you see your next five or 10 years

being?

James: Yes. A lot of different things. We liked kind of the model we are doing so we definitely view are investing as a business. I would say like there is also a difference there. How you are investing and you wanted to be passive and that sort of a thing or do you view it as a scaling of business? We do see that and so we see a lot of opportunities kind of in ancillary kind of parts where as you scale vertically, expand some horizontally. For us too, it is also identifying some additional markets where we can kind of copy, I do not want to say franchise because we would still run it, but being able to diversify into other types of markets. We view Wilmington.

Again, it was a market that was nearby, it was convenient the cash flow worked but the appreciation is not really there and some of our neighborhoods. We have identified maybe some markets that have some better appreciation opportunities even though they may not cash flow as well but then there is also some up and coming cities were the neighborhoods that we think have some really good cash flow is now but also opportunity so it is kind of looking at how do we kind of start diversifying our portfolio in that regard? Then on the investor side, we have also talked about do you start to look at syndication a and we like kind of the debt fund option versus an equity option and some of the things along those lines to kind of as you scale, how do you maintain flexibility and again, a lot there and part of what we have to realize again how specific and general do we want to be versus how much do we want to generalize.

Some of that will be how things evolve, obviously, over the next six months and then a year. We constantly have an annual strategy meeting where we are doing that five year plan and for the last three years it has changed every single time. We sit down and do that based on what we have learned and what we decide we want to do.

Brandon: Yes, that makes sense. When you say you would rather do the debt funding versus like a equity, you are basically saying you would rather pay interest on it rather than splitting the profits as like a partnership?

James: Exactly, yes. For us, it is just the way that our business model makes sense. We need to have a large enough cash flow pool basically coming in rather than paying out on the equity side.

David: Makes sense to me.

Brandon: Alright, well, let us shift gears now and head over to the next part of our show. One of my favorite things that we do in every episode is the Deal Deep Dive. Here is a timely stat for you, but half of us make a new year’s resolution every single year. We have all made them and most of us have probably broken them. But one resolution with sticking to this ear, keeping your home and family. Simplisafe is making it easier than ever with 24 slash seven home security and no contracts or catches. They believe the safest place on earth should be your own home so you feel protected every time you shut the door on your way to work or shut your eyes at night. More than 3 million or using the simply safe to get this piece of mind every day.

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Alright, big thanks for our sponsor as always. Now, let us get to the Deal Deep Dive. This is the part of the show where we dive deep, dive deep, dive deep, dive deep into one particular deal with our guests. James, you got to deal in mind, right?

James: Yes, I do.

Brandon: While we start, we are just going to do quick fire answer questions. Number one, what kind of property is it?

James: The money pit.

Brandon: Okay. Cool, I love that.

James: This is intended to be BRRRR. A single family Roho.

Brandon: Alright, number two. Alright, how did you find it? This one actually came to me. It was a wholesaler who reached out to a member on BiggerPockets who does not invest in the city of Wilmington. A lot of local investors only invest in the county outside of it and he knew I invested in that area and so he forwarded it to me and I reached out to the wholesaler. Funny story, there was actually by contractor was doing a renovation on a property two houses down and he had already been talking with the owner about buying it and I basically had to go to my contractor and say, well you either need to buy it now or I am going to because otherwise this wholesaler is going to go and sell it to somebody else. So it actually all Kinda came together pretty interestingly.

Brandon: Cool. Alright, how much was it?

James: We ended up paying $27,500 for that place.

David: How did you negotiate that price? But we ended up, we are already pretty close, the seller was originally asking 30 and we offered 25 and we basically came back to him and we kind of showed them our scope of work and things that we thought we were going to do on the house. And from there he basically said, yes, I get it, but I need to be able to get some more out of it. And so he was like, I will meet you in the middle. Alright. How did you fund it?

James: We again, used the private lender on the acquisition and the projected rehab numbers.

Brandon: Alright. Did you say projected so we will get to that point. Did you have a projection on how much you were going to put into it?

Brandon: I did. We had originally projected that we were going to spend $29,000 on the Rehab and we ended up spending $38,000.

Brandon: Okay.

James: Then that was just on what the original rehab part and then after we did that, this is actually the property that then set vacant for nine more months and we had the cash out our investor before we were able to refinance it. Then after the tenant moved in, we had an additional $15,000 in expenses and repairs that we had on top of that. All in, what is that, 38 plus another 15, like $53,000 we ended up having to put into it. I did my math quickly right there, yes.

Brandon: Can I ask what went wrong? What was the 15? Like what happened?

James: Yes. It was the roof started to give way and have leaks that we could not find so we had to do multiple repairs to the roof. The furnace ended up going out like in the middle of the winter that we had to replace. We knew it was older but it had serviced fine. Like we did not think we are going to have issues that quickly with it. Then was an old cast iron drain pipe on the one tub that gave out and started leaking water that we had to then go replace the plumbing and do drywall and paint work and stuff like that.

We originally were planning to put the washer and dryer into the basement, but in Wilmington they have a lot of narrow basements so you have to get these smaller 24 inch washer and dryers a lot of times but we could not even get that to fit so then we had to actually build a laundry cabinet off of the living room so we had that additional expense of having to build that out, run electrical and things that we were not expecting. Yes, that was some of the extra stuff. On the front side, it was the kitchen floor had actually buckled in so we had to rip all of it out and re-do all of the joists and everything actually underneath it whereas we thought we were just putting tile in initially.

The electrical panel we knew had to be upgraded because it was an old fuse box, but when we went and re-did it, they could not even put it where it was. They actually had to reroute it because it was too close to the waterline to be current code. It was not even just the swap out, we actually had to move it. It was just all of these kinds of things that older houses have very different things. Most of my properties are built between the 1880’s and 1930’s. That is another thing when you hear a lot of these people on the BiggerPockets, they talk about these standard expenses and how they do things. A lot of that is again on these post 1950’s or 1960’s homes.

I know, Brandon, a lot of places up in Washington are older houses so you probably understand some of this stuff that they have their own different types of challenges. As soon as you go, they are fine as long as you do not touch them, but as soon as you touch them you have to bring them up to code. Interesting challenges there.

Brandon: Yes, older houses definitely do have more expenses. You got to plan on that.

James: Yes.

David: Once you had it all fixed up and the rehab was finally done, what did you end up doing with it? We finally got a tenant in, she is paying $1050 a month right now.

Brandon: Those are good numbers. I mean like even with all of that in there, even though all that sucks, you are still… It is almost a 2% deal even after all of that.

James: Yes. It ended up appraising for less too so that was the other part that then suck. Not only do we put all this extra money into it, but where we thought it was going to appraise for about 95 or 100, it only ended up appraising for 85 and while it does not feel like it is a whole lot like when you kind of want to be able to pull out everything you can when you have already put more into it. Kind of getting hit on the refi side, kind of was not a lot of fun either.

Brandon: Yes, I hear you. Again, hopefully, you have taken care of a lot of that cap x that would have been spread over the next 10 years, you have just front loaded a lot of that which again sucks in the beginning.

James: Yes, right. We are hoping and now we just got to hope the tenant gets a current on her rent before we have to evict her in January. We have got that going too. Like I said, this is the money pit so it is been entertaining, not in a fun way.

Brandon: Like I said earlier, real estate is very forgiving. It sucks that you doing this you are going to learn a ton of lessons. Actually, the last question like what lessons did you learn from this deal?

James: Yes, I mean this is the one that really taught us that the numbers do not always make sense the way that you thought they are going to, right? It was really at that point then we started, again, got our excel spreadsheet models and stuff like that that we do all these things with and we are constantly tuning those and refining those. It was like, hey, we need to tweak what we think these expenses are going to be in how we are going to project this and even after that one we still made more changes to it. I think it is on like version five or six of how we have designed to all the things and stuff like that at this point but that was really the first time where it was like, oh hey. You think we had learned several times and we felt like we had but it is, yes.

Brandon: You know there is a famous quote that Mike Tyson said. He said, ‘Everyone has a plan until they get punched in the mouth.’ I really liked that quite a lot, right?

James: Yes.

Brandon: Like you can plan really really well…

James: That sounds about right.

Brandon: Then at some point you are in the fight and you get punched and then your plan goes out the window sometimes and it sucks.

David: Yes.

Brandon: But yes, everyone has a plan until they get punched in the mouth.

James: Sounds real.

David: Well there is something to be said for that because if you really believe it and you buy into that, you quit trying to figure everything out before you get in the fight and instead you start training for what you are going to do when you get punched in the mouth. Like you start trying to develop a mindset of, okay, when I punched in the mouth how am I going to repeat this action over and over and over so that it is instinct instead of having, oh my God, I do not like how this feels. It is almost like controlling your own emotions in a deal. Like, Oh God, that water leak just happened. This is going to be $12,000 and it feels like you just got punched in the mouth. Are you going to respond to it in this way or that way? That is what successful people concentrate on. They do not try to plan out the whole fight before they get into it. They practice what I am going to do when A, B or C happens and then they have this confidence that can kind of flow.

James: Yes. Again, so one of the big things we are doing right is trying to again figure out how do we better project these things and change how we budget and different things along those lines. We are constantly evolving and I think that is one of the biggest things again that we have learned not only from this deal but all of the challenging ones is there is that constant need to every challenge, everything question, everything it involve every day.

David: Final question for you in this segment of the show. I appreciate you picking out a deal that did not go well.

Brandon: Me too, I was just going to say.

David: That is really cool. That was cool. But even with everything going wrong, are you glad you bought it or do you wish you would passed on it?

James: I kind of wish my contractor had bought it but we are actually talking about that the other day. But again, I think it has opened a lot. I mean like the investor that we had on that, again, he is still a really good friend. We chat about deals all the time. He is still invest occasionally and things along those lines. I think, again going through those challenging experiences, we have got a pretty lengthy detailed investment perspectives that talks all about our market and what we do and how we do on our deals. We do not hide that the challenges that we have had from our investors, right? I mean they are very aware and clear on things have not gone well and how we have reacted and recovered.

To a certain extent, I think that actually has helped us bring on more investors. Actually, we have had more interest in money than we have had deals available to keep that funnel balanced and I think the fact that because every investor is concerned is kind of like, well, this all looks great on paper, but what are you going to do when things go sideways, right? Everybody has learned about how they are going to lose their money and I think the fact that we have been through those experiences and we actually have case studies that we do not hide behind, that we can show how we handle those kinds of situations actually has benefited us in being able to look at the future and have a plan and the ability to grow and scale having been through those experiences.

Brandon: That is really good. I think people should just rewind the last like minute of this and listen to it again because it is so good. When you are honest, when you are transparent, like people can feel that, they can read that and then they are more likely, I believe, to give you money or invest with you or bring you deals or whatever when you can be transparent. So that is fantastic. Thank you, James for sharing all that. That was really a really good deep dive. Again, when people oftentimes like… I mean we love to share our wins and our awesome stories and brag about our great stuff but like in reality like real estate is hard, you get punched in the mouth sometimes. I really appreciate that. Alright, moving on, let us head over the next segment which we lovingly call our Fire Round.

David: Fire Round.

It is time for the Fire Round.

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Stessa brings pro-tools to the everyday investor for free. Take a few minutes to add your properties, link your accounts and everything updates in realtime. Stessa has been featured in Forbes, New York Times, Wall Street Journal. It was built by real estate investors for real estate investors. To learn more and get started with a free account, go to stessa.com/bp. That stessa.com/bp. Alright, let us get to the fire on. These are questions that come directly out of the BiggerPockets forums. We are going to fire them right at you, James. Are you ready for this?

James: Absolutely.

Brandon: Alright, number one, what is a fair deal when splitting profits with a partner? Well, how would you define fair deal?

James: Yes, I think when my partner and I did this, my current business partner was one of my original private lenders on my first two deals. The kind of clear balance was I had some of the operational experience. By that point, I had a three rental properties under my belt and so I would gone through again that first really terrible rehab where we went crazy over budget and all that sort of stuff and had the relationship with the contractors and he had the money. He is also not local, he lives out of state as well further away than even I do. It is kind of a combination of like okay, you have got the money, you have got kind of some of the background.

He also had a kind of connections so when we knew we were going to start raising money, he was kind of better suited given his background and things like that. It was like, hey, you handle those sides and then I will handle this. I think it is did not necessarily have to be split that way but it is being able to be clear on what do you bring to the table and then how do you leverage your skills as best as possible.

David: Did you guys split things 50-50 in that one?

James: Yes, it was kind of on call an unequal capital contribution upfront because but in the agreement it was a 50 -50 split thereafter. All the equity and cash flows and things along those lines or split even though a lot of people think like, oh we have to contribute the same things. But it was known that hey, throughout this partnership I am going to probably put in more day to day responsibilities, interacting with the property managers and contractors and agents and all that sort of stuff. He would have a little bit more of a back office. We talk once a week, we review deals and finances. That was kind of how we view money and time being split differently but then all the profits and things like that, 50-50.

David: Okay, that sounds great. Next question, ‘I am having trouble finding a broker to bring me deals. Can anyone tell me what I should be doing differently?’

James: On this one I would take a look at again, what is the person’s experience, right? One of the things I love about my agent and my broker, again, is he had that appraisal experience. He is himself an investor. Again, he understood not just… I mean there was again a forum post where somebody was like my agent will not do this or will not do that. It is like you drop the agent. Like not every agent is designed or geared to work with investors. Like we have a different way of looking at things.

We have a different set of needs. I think being able to know that upfront, asking for referrals where you can, especially if you know somebody doing things different than you. Like my agent more than likely will not pick up somebody who is doing deals similar to me because like I am the first person he comes to with those type of deal. But he has plenty of other investors he works with that either invest in different neighborhoods or have different criteria and so being able to find where you have that ability to get that alignment as well I think it is pretty big. You only know that by getting referrals or just interviewing enough people to say, how do you do this? How do you do that? This is what I am looking for. Does that fit for your model? Then you have to give it a trial run and see what happens.

Brandon: It is kind of like a funnel. Alright. Number three…

David: How that keeps coming up.

Brandon: I know, it is crazy. Number three, I am constantly running analysis on prospective properties. How do you say that? Analysisees, analysis, analysis, analystses. I am going to say analystses. On prospective properties, I know that there are several rules of thumb I have seen sprinkled around the forums. One of the most important rules of thumb you use when analyzing properties. Do you have any good rule of thumb?

James: Good rules of thumb? I would say location is the first thing that matters. There is nothing that you can do, to get by in a bad location. You have to be comfortable. For me, those were actually the first two things when you are analyzing a deal. Like do not chase something that you are not comfortable with because that is when you are really going to start getting yourself into trouble.

David: Yes.

Brandon: Yes.

James: Once you get past those, I would say Ben Leibovich has a really good posts that he had done and he is linked to it a couple of times and I have not found a permanent link so if we can dig it up and put it in there. But it is basically this like table that kind of covers like all the top cap x expenses, their average life expectancy and costs, and then it kind of basically says okay here is how much you need to save. Because I think that people think that people get like bogged down by is they use like these percentages but again, generally speaking, like a roof costs what a roof costs. Kind of whether it is a $600 house or a $6,000 house. I mean maybe a little bigger, but I mean generally speaking like those costs do not change a whole lot.

Being able to identify, okay, what makes sense for a rule of thumb? Like you got to understand like what I pay for property taxes in Delaware is not nearly what people who are analyzing a deal in New Jersey need to look at, right? Being able to know what rules of thumb you can use and cannot use I think is the important thing rather than just going on the forums and say, ‘Oh, well everybody says use this for cap x and use this for this number and this for that number, the 50% rule.’ I found that there is too much nuance to really kind of use those.

Brandon: Alright, makes sense. Makes Sense. Alright. One of my funny random, I know this is not my interview today but I will say it, well my random rule of thumb when it comes to the neighborhood because you said that, a rule of thumb, this is not like the 2% rule, I know that, it is the rule of thumb that I use, if I would feel comfortable with my wife jogging there at night, then I will buy in that neighborhood. That is just like a simple rule of thumb. I always think that. I am like if Heather went jogging there in the afternoon, like late evening, like would I feel okay with her?

If not, then I do not want to buy there. It is like a silly rule of thumb, but that is how I feel comfortable if she would be alright with it. Anyway, people kind of come up with their own. With that, let us move on to the final segment of the show. This is our Famous Four. Let us get to the famous four. Number one, what is your favorite real estate related book?

James: I had to sit and I had to think a lot about this one just because I think I do not know if I have read a whole lot of real estate books that were not published by BiggerPockets.

Brandon: Nice. Great answer, best answer I heard. Moving on.

James: I know, they are really good resources. Again, I think it tends to be where I am at and certain things I already mentioned. Again, J. Scott’s book on Estimating Rehab Costs was huge for me. Getting started, I am stoked to see the republish coming out here soon.

Brandon: Yes.

James: Then also, again, the book on managing Rental Properties. I mean, I know it, I do not mean to make Brandon’s ego get bigger but between you and Heather, You did an amazing job just… It blows my mind. I think it should be mandatory reading for every property manager to read that book because it blows my mind how clueless these people are. Supposed to be professionals and representing how to do it. They have no idea. They think their job is just to collect money and give it to me and then everything else it is like, well I do not know what to do about that. It is like, no, go read this book and you will understand all of it. Again, that has been huge.

David: Here is an idea. Brandon, you come up with a test that someone has to pass and they have read your book to be able to pass it and then you give them the Brandon Turner certified property manager designation and then all the rest of us can know, oh, you are one of the BT certified PM’s. I could definitely use you.

Brandon: That is actually great idea.

James: Remove all of the guest work out of finding a good PM.

Brandon: We have actually toyed with the idea of that on BiggerPockets is maybe doing something like that. We will see what the next year or so has in store for that actually but I really actually liked that idea. Not like the Brandon Turner approval but could we have, BiggerPockets certified or something, that can be very cool. Alright, number two, David?

David: What is your business book?

James: This one I think I am going to go with The Richest Man in Babylon by George S. Clason. It has just so many really good nuggets. I think that kind of tie in just FI, principles, investing, and just how to live life well and kind of look at all these different niche books and stuff like that. Yes, they really dive in but at the surface I feel like, I mean, as old as that book was, it really encapsulates just so many of the core basic fundamentals.

David: Yes.

Brandon: You do not know like why that book is so good. I mean people mentioned the same similar books over and over on the show, right? People mentioned Richest Man in Babylon, Rich Dad Poor Dad, the E-Myth, right? Even like lately I have had several people recommended one of my favorite book, Life and Air. What these books all have in common is they are stories. They are actually sort of like half fiction books but like there are stories that teach us, right? Because as humans, we learn from story. I always find that so fascinating that at the same books come up over and over and they are always almost these stories. Anyway, very cool. Alright, number three.

David: Number three, what are some of your hobbies?

James: I like to board game a little bit.

Brandon: Nice.

James: My board game shelf behind me. We actually are getting together with a group of BiggerPockets people I think in a couple of weeks and playing some board games, that will be cool.

Brandon: What is your favorite favorite board game? Go.

James: My favorite board game, Twilight Imperium 3.

Brandon: That is such as good answer.

David: That was so specific too.

James: Yes, it is. Sorry. It is one of those games I love getting in the table. Like if you ever played risk, it is like risk on steroids. This game can take like six to ten hours to play depending on how many people you have. It is like this epic Galactic Battle of space races and politics and it is fantastic. Clearly superior to Twilight Imperium 2 but maintaining the same original results in Twilight Imperium: The Original.

Brandon: They just came out with Twilight Imperium 4 also.

David: We should have a review of that.

Brandon: Have you guys ever seen Parks and Recs, the show, Parks and Recreation.

David: They actually came out with that board game.

Brandon: Did they really like in…

David: It was all in Kickstarter.

Brandon: That was hilarious.

David: Somebody actually did a Kickstarter of… I forgot the name of the game but I know…

Brandon: Yes, he made this like to a huge absurd game, like board game, in one of the seasons. Anyway, one of my favorite shows. Anyway, keep going.

James: No, this is it. The other thing is my daughter will turn two months old in like a week and a half so spending time with her and my wife has also become… I mean always spending time with my wife was always a priority but having my daughter around now has been pretty awesome too.

Brandon: Two months old. You are sleeping a ton right now.

James: No, dude she sleeps like crazy. Like it is awesome. Like, yes. I mean starting like Thanksgiving week, she started sleeping like six to eight hours a night. I know I am not supposed to knock on wood but I am knocking on the table because she has been fantastic. We are so lucky.

Brandon: My daughter slept really well to until about three months and then it all went downhill from there.

James: Thanks, Brandon. I am going to blame you if that happens though.

David: For those who cannot see, if you are not watching this on YouTube, James literally has an entire background full of board games behind his head.

Brandon: Yes, there is like a 100 of them at least.

James: Yes, it is like legit, like I do not know what you would call this, like a nerd cornucopia going on of board games back there. I do not know. Maybe I will take a picture and put it on my Instagram or…

David: You know what? I do not see Monopoly anywhere back there either.

James: No, you will not see that.

Brandon: Oh man, that is my game. That is my board game. Alright, what do you think sets apart successful real estate investors from those who give up, they fail or they never get started?

James: Again, I was obviously thinking a little bit about this one and kind of came up with two pieces. One for me was the fear of responsibility and a lack of honesty. Kind of the fear of the responsibility is, again, that taking action and again just everybody always hears about the oh when you become a landlord, you are going to fix toilets at 2:00 in the morning and so it is that like how do I actually react and respond when things do not go well.

Again, the lack of honesty is a lack of honesty with yourself, with your partners, again, about who you are, where you are and all of that kind of stuff because, again, I think the people that do not understand they are in a tough spot again. Do I want to be putting the brakes on and not be buying more properties? Like no, like I was all going to call in one time. Buy more, buy more, this would be awesome or we will just get past it but again it is just one of those like, okay, you know what, something is not right here, we got to figure it out.

Just being able to take that step back instead of keeping the gas down. I know a lot of people probably got in trouble, in that back in ’08 or ’09 and all the fun stuff and it is kind of one of those like, alright, we know we want to be in this for the long haul so we got to be honest about where we are and what we need to do to make sure we are still doing this in two years, five years, ten years, whatever.

David: Alright.

Brandon: That is a great answer.

David: Thanks, James. That is very good advice. Tell us where can people find out more about you?

James: The BiggerPockets forums are a great spot. If you are going to reach out and connect though, please leave a message. I always like knowing why people reach out. It kind of drives me crazy if this line connects and I never get like a message just saying, hey, here is what…

Brandon: That is like a great tip.

James: It is cool, annoying or whatever. Always leave that message. Then other than that, I am on LinkedIn and then I am on Facebook but I do not do a whole lot. Twitter, casually there. Then I just started up an Instagram so I am going to start trying to build a more active on Instagram with pictures of our properties and what is going on and stuff like that.

Brandon: What is your Instagram handle?

James: It is just James.Masotti1313 or james.masotti1313. I sent it over. Again, I just started it like a week or so ago.

Brandon: We will link to it in the show notes as well, BiggerPockets.com/show312. We will link to it there. But a very cool, I was going to say one thing real quick. For those who do not know what you are talking about, when you said you can find me on BiggerPockets, people are like wait a second? This is a podcast, right? BiggerPockets is a social network. It is like Facebook, Twitter, less cat videos, less politics, more real estate, right? You have a profile on BiggerPockets, if you are listening to this and you are like, wait, I do not have a profile, guess what? It does not cost anything, it is free.

Go set up your profile, then you can send colleague requests to people and you become colleagues, kind of like a friend, right? You can also follow people kinda like on Twitter. You can follow, you can have private message conversations, which is huge, right? You can upload your like in your profile that you can put deals that you have done. Like there is a deal diary section, upload your deals, then people can see what you have done. All these things. This is part of the social network of BiggerPockets. So if you are just a podcast listener, I would encourage you and implore you to join James and like tens of thousands of other people every day on the forums and in those social network.

James: Yes, and it is huge. I mean I think it is critically important to have your profile will be updated. I mean, I have my deals in mine, I have an explanation of mine, I have the video in there because again, it is, when you start seeing and following people who are posting regularly on the forums and contributing, you want to be able to kind of go out and find more out about them, their market, how they do things. There is a number of investors that I have reached out to and had fantastic conversations via private message. Like the forums are just like the tip of the iceberg. When you get into the relationships that you built and being able to do private messages. There was a post, a threat that got a couple hundred follows a couple while ago. It is like where are all the BiggerPockets members and things like that? There were so many of them from a lot of these guys that have $5,000 to more posts. They are like, yes, we have been here a lot.

We get a little sick and tired sometimes of asking a lot of the newbie questions because you can find those in the search bar, but we are still here and we are still interacting with each other, but we tend to do it again in those private forums and things like that where we are having conversations with ourselves and I think the new gold book with like the mastermind thing. I mean it is kind of like those are like almost like selfgrown within those people. It is like there is generations of BiggerPockets users that have come in at different stages and like you kind of get to know each other from seeing those posts and reaching out and sharing stories and I think that is such an a resource that people do not realize when they come in and they only do a couple of posts and then they get out there. They are not only experiencing such a small part of what the forums have to offer.

Brandon: It is so true, so true. Dude, this is fantastic. Thank you so much for joining us today, man.

James: Yes.

Brandon: It has been great to hear your story, your journey, the struggles, the winds, everything. Like you are very open, real honest guy, so thank you.

James: Absolutely. Thanks for having me on. It has been a lot of fun and hopefully people can learn from some of the experiences we have been through and understand that when you have those hardships, there is a way forward.

David: Yes. You need to make a board game detailing the way you put your board games together.

James: It would probably be really complicated with lots of rules, take hours to play.

David: Alright. Well, thank you, James. This was a great interview today. I think we got a lot of good information. I appreciate you having me on here. Hopefully we can check back with you in a couple of years to see how things are going.

James: Awesome.

David: That being said, this is David Greene for Brandon ‘Mike Tyson’ Turner, signing off.

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