I Said I'd Never Flip a House...Why I’m Starting in 2025

Summary

Summary of "I Said I'd Never Flip a House...Why I’m Starting in 2025"

Podcast Title: BiggerPockets Real Estate Podcast
Host: Dave Meyer (Head of Real Estate at BiggerPockets)
Episode Title: I Said I'd Never Flip a House...Why I’m Starting in 2025
Release Date: December 18, 2024

Introduction

In this compelling episode of the BiggerPockets Real Estate Podcast, host Dave Meyer shares a significant shift in his investment strategy: transitioning from his longstanding stance against house flipping to embarking on his very first flip. Joining him is James Dainard, an authority in the field and author of the "House Flipping Framework." Together, they delve into their new house flip project in Seattle, exploring the reasons behind Dave’s change of heart, the intricacies of their partnership, and actionable insights for listeners interested in replicating their success.

Embracing House Flipping: Dave Meyer’s New Venture

[00:05] Dave Meyer:
"I have never flipped a house. And if you've listened to this show for a while, you've probably heard me say that I will never flip a house. But it turns out that wasn't true because now I am flipping a house and I'm doing it with the guy who literally wrote the book on house flipping, James Dainard."

Dave Meyer opens the episode by candidly admitting his initial reluctance towards house flipping. However, a successful collaboration with James Dainard on a previous podcast challenge sparked his interest, leading him to pursue a flip despite his reservations. This honesty sets the stage for a transparent and informative discussion about the flipping process.

The Seattle Flip Project: Details and Strategy

Property Acquisition and Initial Assessment

[02:24] James Dainard:
"I think this house is a winner. I'm gonna lock it down because I think it's a buy no matter what...."

James Dainard introduces the Seattle property, highlighting its prime location in a Class A neighborhood and its potential for significant appreciation post-renovation. Purchased for $825,000, the property spans 2,500 square feet with two bedrooms and one bathroom initially. James’s swift decision to acquire the property underscores the importance of timing and market awareness in successful flips.

Renovation Plans and Budgeting

[04:28] James Dainard:
"We think we're going to be putting in about $250,000 into the renovation....

The renovation strategy involves expanding the property from a three-bedroom, one-bath home to a four-bedroom, three-bath residence. Key enhancements include adding a formal PR area and completely rebuilding the garage, which is currently in disrepair. The total renovation budget is set at $250,000, aimed at elevating the home’s market value to an estimated $1.5 million.

[05:15] Dave Meyer:
"Yeah."

James emphasizes a conservative approach to comparable sales (comps), avoiding outliers to ensure realistic and achievable sale targets. This meticulous planning is crucial for mitigating risks and ensuring profitability.

Assessing Structural Integrity and Minimizing Risks

[08:30] James Dainard:
"What makes a house good or not or what makes it complicated? It's. Does it have a foundation or not? That's really my biggest concern..."

James underscores the significance of evaluating a property's structural integrity before committing to a flip. By choosing a home with solid "bones," they minimize the need for extensive structural modifications, thereby controlling costs and reducing renovation time.

[09:27] Dave Meyer:
"Even when I went over there and I don't have as much experience, you could tell, like the bones and the layout were solid..."

Dave's observation aligns with James’s assessment, reinforcing the importance of selecting properties that promise a straightforward renovation process.

Partnership Structure: Operator and Equity Partner

Equity Partnership vs. Debt Financing

A central theme of the episode is the structuring of their partnership, balancing risk and reward through an equity partnership rather than traditional debt financing.

[16:10] James Dainard:
"We bring on partners to give us more purchasing power because we have the teams, we can execute the plan... Instead of bringing in debt, a lot of times bringing an equity partner... We don't have to worry about cash flow because our investor is the person bringing in the capital."

James explains that equity partnerships allow operators like himself to secure the necessary funding without incurring high-interest debt, thereby aligning the interests of both parties towards the project’s success.

Advantages of Joint Venture Agreements

[27:07] James Dainard:
"When we decided to partner on this house, I had already closed on the house, so I funded it... And we did that through a joint venture agreement."

Joint venture agreements formalize the partnership, detailing each party's responsibilities and protections. This legal framework ensures clarity, accountability, and a structured approach to managing the investment and its associated risks.

Building Trust and Ensuring Effective Communication

[25:26] Dave Meyer:
"You have to put your trust in this person, and what will be, will be... you are passive, you are quiet, you are silent. You are backing an operator that you believe in, and then you got to let them do their job."

Trust is paramount in equity partnerships. Dave emphasizes the need to rely on the operator's expertise without micromanaging, likening the experience to a tandem skydiving adventure where the investor trusts the operator to handle the complexities of the plunge.

[26:21] James Dainard:
"Too many cooks in the kitchen is a bad thing... The partner needs to be like-minded. They need to also understand risk...."

James reinforces the importance of having aligned goals and mutual understanding of risks to prevent conflicts and ensure smooth project execution.

Risk Management and Due Diligence

Conservative Financial Planning

[31:42] James Dainard:
"As an operator for me, I like to be pessimistic because it's easy to under promise and over deliver."

James advocates for a conservative approach in financial projections, emphasizing the protection of investor capital by setting realistic expectations and avoiding overly optimistic forecasts.

Vetting and Selecting the Right Partners

[34:24] James Dainard:
"And you know, if an operator won't give that to you, I, that's a red flag."

Identifying and partnering with trustworthy and experienced operators is crucial. James advises investors to thoroughly vet operators, request documented evidence of past successes, and ensure that the operator's methodologies align with their investment goals.

Operational Insights and Learnings

Understanding Construction Costs

[36:08] James Dainard:
"And the construction is the brick and mortar to all this. Lending partnerships. That's the component that tells it whether it's going to be profitable or not."

James highlights the critical role of accurately estimating construction costs to ensure project profitability. Dave expresses his eagerness to learn more about benchmarking construction expenses, recognizing its importance in evaluating and vetting future deals.

Maintaining Accountability and Transparency

[35:15] Dave Meyer:
"I do the same thing when I underwrite a rental property. Like I underwrite for low growth, for high expenses, for low appreciation, for low rent."

Dave shares his strategy of planning for the worst-case scenarios to remain comfortable with his investments, a practice that aligns with James’s conservative approach to projections and budgeting.

Conclusion: A Learning Journey and Future Updates

Dave Meyer concludes the episode by expressing his excitement about the partnership with James and the forthcoming flip project. He emphasizes the educational value of the journey for both himself and the listeners, particularly for those investors who may lack extensive construction experience but are eager to explore high-upside investment opportunities.

[38:03] James Dainard:
"I better look good so that's extra pressure for you. We gotta hit this deal right or this is not gonna be good for me."

This light-hearted yet earnest comment underscores the accountability inherent in their partnership, motivating both parties to strive for success.

Key Takeaways

1. Flexibility in Investment Strategies: Being open to new approaches, even those previously dismissed, can lead to substantial opportunities.
2. Structured Partnerships: Clear roles, legal agreements, and mutual trust are essential for successful equity partnerships in real estate flipping.
3. Due Diligence: Thoroughly vetting both the property and the partnership ensures minimized risks and enhanced profitability.
4. Conservative Financial Planning: Setting realistic expectations and preparing for potential setbacks safeguards investor capital.
5. Learning and Adaptation: Engaging with experienced operators provides invaluable insights and accelerates learning for investors new to house flipping.

Notable Quotes

• Dave Meyer [00:05]:
  "I have never flipped a house. And if you've listened to this show for a while, you've probably heard me say that I will never flip a house. But it turns out that wasn't true because now I am flipping a house and I'm doing it with the guy who literally wrote the book on house flipping, James Dainard."

• James Dainard [08:30]:
  "What makes a house good or not or what makes it complicated? It's. Does it have a foundation or not? That's really my biggest concern..."

• Dave Meyer [25:26]:
  "You have to put your trust in this person, and what will be, will be... you are passive, you are quiet, you are silent. You are backing an operator that you believe in, and then you got to let them do their job."

• James Dainard [31:42]:
  "As an operator for me, I like to be pessimistic because it's easy to under promise and over deliver."

This episode serves as a valuable guide for real estate investors contemplating house flipping, offering practical advice on partnership structuring, risk management, and strategic planning to achieve financial success in the competitive Seattle market.

Transcript

[James Dainard]

Foreign.

[Dave Meyer]

I have never flipped a house. And if you've listened to this show for a while, you've probably heard me say that I will never flip a house. But it turns out that wasn't true because now I am flipping a house and I'm doing it with the guy who literally wrote the book on house flipping, James Dainard. Today, James is joining me on the podcast to talk about our new flip project in Seattle. Why I've decided now is the time to try this strategy I swore I would never do and how lots of you listening to the show can replicate.

[Ashley Care]

Our partnership and become a flipper, even.

[Dave Meyer]

If heavy rehab projects seem super intimidating to you. So, James, thanks for being here, man.

[James Dainard]

I'm excited. And I get to walk you through your first flip.

[Dave Meyer]

I feel like this is your dream. You genuinely just love teaching people how to flip and I really want to learn. So I feel like this is going to be a great partnership for us.

[James Dainard]

Oh, and I love when I teach a long term term hold. And a passive investor had a flip because they're like, why was I hating on this for so many years?

[Dave Meyer]

I feel like I'm going to have that revelation at the end of this. But actually, I should explain that we kind of already teased this out just to set this up. Like, James and I co host work together on the on the Market podcast. And on that show, we sort of did a bet earlier this year on who would have a more profitable flip, Henry Washington or James and Kathy Fecky. Bet on Henry. I bet on James. I wound up investing in that deal a little bit. Ashley Care from the rookie show got in on it. It was kind of this fun thing that we did and James hit it out of the park. It was this massive success. And so it got me a little bit more interested in doing it again because I saw that I could be relatively passive. And yes, I'm taking on risk, but I could get in on the big, substantial upside of flipping. Even though I'm not great at construction and value add, like, isn't my bread and butter. And so that's sort of the context for this. And then a few weeks ago, I told James I was like, kind of interested in it. I got this text from him in the middle of the night being like, hey, I found a property for us to partner together and flip on. And he sends me this video. I'm. I'm actually just going to play some of the audio and play the clip for you because it's really funny.

[James Dainard]

All right, Dave, I'm late night Creeping for you. I think this house is a winner. I'm gonna lock it down because I think it's a buy no matter what. But looks like there's two beds, main floor, bathroom, living, kitchen, eating nook off there. But we got 2,500 square feet. This thing should be worth 1.5 million. Good street. We'll probably be 250, 300, depending on how nice you want to do it. If you want to build to the cost, you're probably 250. All right, so up here we got two beds and a bath. And then you got a basement. Going in the basement. Creepy, creepy. This what I do for you, Dave? Oh, not that creepy. There's lights on. And then we got space down here. Oh, dude, this is a winner. That is pro bass jobs. There you go. Good ceiling height. Yeah, this is a buy. I'm going to lock it down. We can talk about it later.

[Dave Meyer]

All right, so you heard James's opinion of this property, but since everyone obviously couldn't see the whole thing or saw everything you saw. Tell us a little bit, James, about this property, how you sourced it, where it is, all that well.

[James Dainard]

And that is the thing, you guys. Time kills deals. I got a phone call on this at like 7:00 at night, and I was not ready to go, and I dropped what I was doing. I bolted out there. It was dark, it was creepy. But because I did that, I told the guy, yes, we secured the deal. And I don't think we would have had it the next day, really, you know, when you have a good piece of property, you know. And this is why I got so excited about this one. Soon as I saw the address, you know, I was like, oh, this is in a prime, class A neighborhood of Seattle.

[Dave Meyer]

Yeah.

[James Dainard]

And then the price that was brought to me was really almost. It was dirt pricing. Builders were paying that much for that lot roughly right there, maybe a little bit less. And so I knew I had to rush out there right away. I knew the square footage, the price, the location. You can't wait on it.

[Dave Meyer]

Give me just like a high level overview. We bought it for 825. How much do you think we're going to put into it and what can we sell it for?

[James Dainard]

So we think we're going to be putting in about $250,000 into the renovation. So we're going to do a pretty high quality renovation. And in our Seattle market, that's typically what I pay for something. If we're taking it to studs, wiring, plumbing, framing, it's about 100 bucks a foot for me on that size house. And I actually think we might be a little bit below that.

[Dave Meyer]

Bam.

[James Dainard]

So we have 250,000. And what? That $250,000 is going to take the house from a three bedroom, one bath property into a four bedroom, three bath with a formal PR in addition to, it's going to rebuild the entire garage. Because the garage is caved in, it is busted, and it needs a brand new one. By doing this, the comps then jumped up to, you know, when I sent you off those comparables, they were conservative too.

[Dave Meyer]

Yeah.

[James Dainard]

You know, as flippers, this is a high risk business. You don't want to go for that outlier comp. Like, don't chase the star, go for the cluster.

[Dave Meyer]

Oh, that's a good term. I've never. Did you make that up?

[James Dainard]

I, you know, I think I just made that up right now.

[Dave Meyer]

I like that. Yeah. You want to stick to like what's been proven time and again. You don't want like, oh, there was this one amazing sale. You don't know what the context of that one sale was. But if it's, if it's a comp gets repeated several times, it gives you some more confidence.

[James Dainard]

Yes. And that's what we're looking for. Patterns. What is the averages? And you know, so when we sent off the comparables, we had a range of them. They were anywhere between 1, 4 for houses that were 7, 800 square feet smaller, all the way up to 1.6.

[Dave Meyer]

Yeah.

[James Dainard]

And maybe even a little bit higher.

[Ashley Care]

Yeah.

[Dave Meyer]

This is when I got pretty excited about it because the first comp was a 4, 2, a little bit bigger, 2600 square feet, but sold for almost 1.6. In a similar neighborhood, we saw one at 1.4, 1.5. And this, you know, I went over there and it's a really nice block, really walkable neighborhood. Just seems like there's really good upside. So this, this got me very excited. Despite my a little bit of sticker shock when you told me what we were going to have to pay for, for the acquisition cost.

[James Dainard]

It's amazing what you get for a million bucks in Seattle nowadays. But what it comes down to is there the margin, that's what I'm always looking at.

[Dave Meyer]

Is there the return within your buy box. Is this what you consider a good deal, Standard deal, thin deal?

[James Dainard]

This is, I would say higher than average deal. So for my buy box is a flipper in Seattle and it changes with the market. You know, when the market's really Hot. I will look at deals. If I can make a 30% return in six months, I will look at buying that deal.

[Dave Meyer]

Yeah.

[James Dainard]

And when the market's more normal is 35%. And when I'm a little worried about the market, it goes anywhere between 40 and 50% cash on cash returns. And so I don't really move numbers. I don't think about depending, like, is it going to be worth less, is it going to be worth more? I just go in with a smaller or bigger margin based on what I think the market's doing. And, you know, that kind of trains me as an investor to go, okay, is this a buy or not? Is it worth the risk? Is always the question we're asking. Because flipping is a very, very risky business.

[Dave Meyer]

That's actually one of the things that made me feel a little bit better about this deal, because I see some of the deals you do. James once posted on Instagram this video of him throwing a roc with his arm through the roof of a house he was about to buy. That's how dilapidated the house was. And that's the thing, for me, as someone who doesn't have a lot of experience with construction, I've done burrs, I've done rental renovations, but I haven't really done, like, a full house makeover. I was really worried about it. You know, this is what has kept me out of flipping. But, like, this house, like, what do you look for that makes you feel like this is lower risk or, like, worth that considerable investment? And signals to you that this construction plan isn't going to be overly complicated or costly.

[James Dainard]

What makes a house good or not or what makes it complicated? It's. Does it have a foundation or not? That's really my biggest concern because if I have to do structural foundation work, it takes time. It can be six to nine months as you're waiting for permits.

[Dave Meyer]

Yeah.

[James Dainard]

So I'm always looking at what's going to slow the project down. And so when I went out to look at the house for us, you know, one of my concerns was it was an old house, nearly 100 years old. Do we have to reframe the entire structure? Because sometimes your bottoms, they're really bad layouts. And to maximize the value, so we pulled the comps, we looked at those. What do we need to create? I ran out there to go look at it. And what. I was pleasantly surprised with this. I call it a 6 out of 10. There's a lot of good walls in spots. They should already be.

[Dave Meyer]

Yeah, right. So you don't have to shift things around.

[James Dainard]

Not very much. You know, we're open up some spaces, create a primary and there's not a lot of structural framing in the house and that is important for speed and cost.

[Dave Meyer]

Even when I went over there and I don't have as much experience, you could tell, like the bones and the layout were solid, like you weren't going to have to do some crazy stuff in there. And that, that personally made me feel a lot better about this deal.

[James Dainard]

Yeah. And when you walked in the front door, it was straight. That's a big indicator for me. Is it sagging? Is it sinking? And the house actually has really good bones.

[Dave Meyer]

I love to hear it. That's great. All right, it is time for a break.

[Ashley Care]

But first, if you're enjoying this conversation.

[Dave Meyer]

You may want to check out James's new book. It's called the House Flipping Framework. James, as you've heard, has flipped thousands of houses in his career, and this book is his tactical playbook for scaling your portfolio and reinvesting your profits. Even if you can't invest directly with James like I'm doing, you can get almost all of the same insights by.

[Ashley Care]

Reading the House Flipping Framework, which is available at biggerpockets.com/house flipping yt.

[Dave Meyer]

We'll be right back.

[Ashley Care]

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[Dave Meyer]

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[Ashley Care]

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[Dave Meyer]

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[Ashley Care]

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[Dave Meyer]

All right, thanks for sticking with us.

[Ashley Care]

Let's jump back into this conversation about.

[Dave Meyer]

Me and James flipping a house together. James and I will update everyone about this deal as we're sort of going through. We're going to make some YouTube videos about it, so we're not going to get too far into that much about the house itself. Right now I want to talk about the partnership structure because I think this is something that's going to be really applicable to everyone here. But before we do, just what's the update? Where are we in the process right now?

[James Dainard]

Okay, so we closed on this property about a month ago? Roughly, yes. And right now we've had an architect go through create our after plan. We've submitted that to the city for Permits. We also did an asbestos test on the property because when we're taking that much out of the house, we want to make sure that we're not going to trigger some environmental. It did test hot. Dave, your first house is covered with asbestos.

[Dave Meyer]

Oh, I've done this for rentals. I'm used to the abatement. I know this game that usually will.

[James Dainard]

Freak people out too. They're asbestos. And I'm like, just don't eat it and everything's fine.

[Dave Meyer]

It's scary that stuff. If you look into it. I don't want to mess with that. You hire pros. That's what I would do. But I understand people. It's very expensive.

[James Dainard]

It can be, but you got to price it right. So we got a fairly. We probably have the cheapest asbestos removal guys in the state doing our.

[Dave Meyer]

Oh, nice.

[James Dainard]

And so because it tested hot, we had to do a 10 day notification to clean air. We had to wait 10 days and then they could start abating. So we did have. And this is the thing about these older houses with bigger margins. There's little hiccups that you don't expect even with the asbestos delays in scheduling and engineering because you're really dependent on that part just to get your site planned and prepped. And then we've had the roof quoted out that's being installed this week and the garage is going to start getting reconstructed before the permits rolled out for the house starting next week.

[Dave Meyer]

And I think you said when we were talking the other day you think from permits it will be four months to completion, right?

[James Dainard]

Yeah, four months. And that's an aggressive schedule. But we have a general. That has loosened up a lot of work. He doesn't have a lot of workflow. So typically it would take him five, five and a half months. And four months is going to be the goal. And that's something I will talk to you about once we are locked into a date because I also like to throw bonus at the contractor if they hit that day for sure.

[Dave Meyer]

I do want to turn to sort of the partnership side of this because like I said, I've sort of never thought I would participate in a flip in any way. And then I realized sort of this through this game we were playing on, on the market and just like being in this industry long enough realized that like there is a role for passive investors in flipping for certain people. Not all operators want to do this. But you created a structure that was sort of like a, a really good win win opportunity. I felt for both of us and I think would be really helpful for you to explain it to the audience because there are probably, I'm guessing there are other people sort of like me, who are more passive rental property investors who would be interested in investing in a flip if the right partnership came around. So tell everyone a little bit about how you structured our deal.

[James Dainard]

We bring on partners to give us more purchasing power because we have the teams, we can execute the plan. There's no reason for us not to go buy the deal. Typically when we do this, there's two ways that we raise capital, and most flippers do it this way as well is you're either going to raise it with debt, where you're going to be taking on a hard money loan and then maybe a secondary private money investor loan or even a private investor for the whole thing. And they will give you high leverage where you can get your entire deal funded with leverage for the most part. And that's going to cost you usually rates, you know, anywhere between 10 and 15%, two points, depending how much leverage it is. But then as the operator, I'm stuck paying debt that whole time.

[Dave Meyer]

Yep.

[James Dainard]

And this is a game of cash flow, too, because when you have 30, 40 projects going on at a time, you know, I think our average monthly payment for hard money right now is probably like, we probably pay 250 grand a month. Wow. In. In interest payments.

[Ashley Care]

250. Damn.

[James Dainard]

It's. And so we have to pay attention to that. That's a wave. Right. And. And so when you bring in a partner, so instead of bringing in debt, a lot of times bringing an equity partner, this is where you're not going to be paying them interest or points. And you can bring in a partner. And in our partnership, you know, I'm responsible for sourcing the deal, running the project, taking it through the execution, being the operator. And your job is to wire me the money that we need.

[Dave Meyer]

Yep.

[James Dainard]

And it works out really well because we don't have to worry about cash flow because our investor is the person bringing in the capital. The negative thing is, as an operator, we're paying out more.

[Dave Meyer]

You're giving up upside.

[James Dainard]

We're giving up upside. And also the cash on cash returns that we get on our flips are a lot higher than what we can borrow money for. 10 to 12%.

[Ashley Care]

Right, right.

[James Dainard]

Yeah.

[Dave Meyer]

Because you could leverage it more and earn a higher cash on cash return.

[James Dainard]

Yes.

[Dave Meyer]

But I guess the counter side is that when you take on a partner like me, you are taking less risk because when you take on debt. Right. If the deal goes sideways, the bank eats first and so the equity partner gets, you know, you would get left hold in the bag. Whereas this time if something went bad, we would split the downside and it would probably hurt less, Right?

[James Dainard]

Correct. So that, you know, Dave, we've done some lending stuff together too. And you know, you make 10 to 12% on the money and that's a guarantee with a personal guarantee behind that. So whatever happens on that project, you are getting paid your rate and your points with equity. Like you said, if the deal goes bad, the return can go down or go into the red. And so that's why there's more profit in the beginning. You know, like on this deal when I sent you over, you know, we looked at the comps, we looked at the purchase price, we looked at the budget when we were looking at the return. It's a high return. It's like 60%.

[Dave Meyer]

Yep.

[James Dainard]

In there. And a 60 return is a lot more than 12 to borrow. But you're also taking on risk. If we hit, let's say the market crashes tomorrow, you're going to be in the red too.

[Dave Meyer]

Yeah, for sure.

[James Dainard]

And so it's, that's why there's that upside. And as an operator, balancing your partners is actually really key because you don't want to be all in, in leverage and be paying those payments all the time. You want to kind of balance it out. And then for us too, because we do a lot of projects, we like to have long term partners and, and have them in multiple different types of revenue streams so they do well in the long run.

[Dave Meyer]

That makes a lot of sense. And I mean, from my perspective, it's great. Like, I understand that this type of deal is risky for me, it also has great upside. But for you doing as many deals as you want, I can see why you wouldn't want to do all max leverage. That's really risky. And you wouldn't want to do all equity partnerships because you'd be giving up a lot of upside. So coming up with a blend of financing options and different approaches to financing your deals makes a lot of sense to you. We gotta pause for some ads, but stick with us because after the break we'll talk about how almost anyone listening.

[Ashley Care]

Can replicate this partnership that James and I have formed and learn how to flip firsthand.

[Dave Meyer]

Hey, real estate investors, whether you're a.

[Ashley Care]

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[Dave Meyer]

We're back. Here's the rest of my conversation with James Stainard. You know, we could talk maybe at length. It's probably a whole other show about how someone like me should vet an operator. Obviously, this is a unique situation. You and I know each other and so, like, I, I trust you. But I think the other side of this is less talked about and maybe even more interesting to some of our audience, which is like, what do you look for in a partner? Because you have done a million deals, you can probably, you know, you have banks that you can use. Like, what is the ideal equity partner for you? Because I would imagine there are other people like me who want to invest passively in these types of high upside value add projects, but don't really know how to structure and strike a partnership with an operator.

[James Dainard]

In the Pacific Northwest, we run eight different businesses and they take a lot of time in management. And the thing that I've Learned in our 20 years of doing this is too many cooks in the kitchen is a bad thing. Too many opinions on a deal is a bad thing. And so we don't take money from everybody. We actually turn it down pretty regularly. It's a matter of we have to have the right partner and the partner needs to be a. Of like mind. They need to also understand risk. We do not sell fairy tales. Like, I mean, Dave, me and you have talked about, like, yeah, everything can go bad. You could lose all your money.

[Dave Meyer]

Yeah, I know that part of the game.

[James Dainard]

And that's important in this agreement and partnership.

[Dave Meyer]

Yeah.

[James Dainard]

Like I would say, never take money from someone that doesn't fully understand what they're. They're getting themselves into.

[Dave Meyer]

Yeah.

[James Dainard]

And so we don't want someone in the background trying to, you know, talk to my team regularly. They can get updates, but they cannot direct. And if they ever have a question, say, hey, I'd just like to know about this to learn. Oh, by all means. I'll sit there and chat with them all day long about it. But at the end of the day, it's my plan. Yeah. And if they don't want to do my plan, that's okay. They can do their own plan. And so that's important because it's not. Because I just think I know everything. It's because it provides clarity to everybody working on the job site. When there's more people involved, the telephone game happens and mistakes happen.

[Dave Meyer]

Yeah. And everyone has to have a different job, whether it's a flip or business. Right. Like, you should specialize in what you're good at. My specialty here is just wiring you money and then never directing anything, Just asking questions about what to learn. The way I think about it is like, you're sort of going on a ride. I. I don't know. Have you. Have you ever been skydiving, like, with, like, a tandem person?

[James Dainard]

No. I was supposed to go four times in a row, and it got canceled for weather. Four times in a row.

[Dave Meyer]

Oh, my God.

[James Dainard]

And then I took that as a sign that I should not be going.

[Dave Meyer]

To not do it. Okay. Well, it's like, the reason I always think about this way, because, like, you're going, and unless you have your license, you basically just get strapped to the instructor and they jump out and they do everything. And you're just basically saying, like, I'm trusting this person with my life, their experience. I'm not going to say anything. I'm just going to go along for the ride. And, like, obviously, real estate has different risk and reward than skydiving, but it's kind of the same thing where it's just like, you have to put your trust in this person, and what will be will be you being, like, wanting to know every detail or put your opinion is not going to help the situation. And so you have to recognize that in this type of deal, you are passive, you are quiet, you are silent. You are backing an operator that you believe in, and then you got to let them do their job. You can't sort of try and micromanage these situations.

[James Dainard]

No, it just gets, you know, like, I've invested with Kara Beckman. Yeah. That, you know, on some projects, and she's like, wow, you're the easiest partner. I'm like, well, because I'm the operator, usually. And she's like, well, don't you have an opinion? I'm like, I have an opinion, but you're in charge. If you want my opinion, call me and ask for it and I'll give it to you. But I was like, whatever you think we need to do, let's just do it. But I do want to know if you're going over budget. We're going over timeline.

[Dave Meyer]

Yeah.

[James Dainard]

And why? Because as an investor like Dave, I may not want you to participate, but you still need reporting, you still need progress updates, and that's Clarity is so important in any real estate partnership, and especially when you're dealing with operators and funding and picking the right people. Do you partner with is essential?

[Dave Meyer]

Totally, yeah. The way I sort of think about it is when you invest passively, whether this particular deal or when I invest in, like, a fund or in a syndication, you're agreeing with the operator to a business plan. Like, there's a lot of conversation up front about, like, here's the structure of the deal. Here's the asset that we're buying. Here is the thing that we're trying to accomplish from this deal. And after the agreement is made, what I want to know is, like, are we on track or are there deviations to that agreement? And if everything's on track, I don't really care.

[James Dainard]

You have to trust your partner. Like me and Will, my business partner. He runs his set of books, I run my set of books, and we fully trust each other, that we're doing the right thing. And if you don't have that trust, don't do the partnership. You always have to have trust. You always have to have clarity. And that's why the documents are also so important, because it does outline everybody's responsibility when you're putting together these partnerships. When we decided to partner on this house, I had already closed on the house, so I funded it. You back filled in with the partnership, and then we did that through a joint venture agreement. And the joint venture agreement is the contract, and it's how it protects me as the operator, protects you as the investor. And it spells out, the thing about a joint venture agreement is you can go as detailed as you want, who is doing what and who is responsible for what. And then where is the accountability? You know, like in a joint venture agreement, you could write in that. You could ask accounting for a forensic audit every week if you wanted.

[Dave Meyer]

Yeah. And you would have never taken my money if I asked for that?

[James Dainard]

No, I'm like, I'm gonna send you my accounting bill, too. It's. But that's in that. That's why it's so important with the clarity. Like, you know, because you can know the people really well, and the deal can still go really bad.

[Dave Meyer]

Of course.

[James Dainard]

I mean, I've done some deals with buddies and. And I don't blame them. It's just the deal went bad. That's hard. Right. Because you're trusting that process. You're trusting the market. But the clarity and the paperwork, that's why you always have to have. Don't Jerry. Rig the thing. You have to have the right paperwork because that's what's protecting your money.

[Kathy Fecky]

Yeah.

[Dave Meyer]

I mean, even if deals go well, you need to have that right. You need to have everything laid out on every one of these partnerships. And, and you know, luckily for me, in this deal, like you have a structure that works for you. And I was happy to sort of slot into, but I've done other partnerships and that is the work too, in my opinion is like making sure that everyone has not just mutual agreement, but incentive alignment that like we both win when there's upside and we both lose, like sort of at a proportionate rate if there's a downside. And that, that way no matter what happens, win or lose, like everyone feels like they're treated fairly, you know, and that they got a fair shake. And like, that's how I feel this.

[Ashley Care]

Structure works for me.

[Dave Meyer]

Even if the deal goes poorly, I feel like we're both taking on an appropriate amount of risk to earn a potential for an appropriate amount of reward.

[James Dainard]

We don't look at per deals, we look at people as long term partnerships. And it's just, we're okay doing that because yeah, we're also making a return and you know, and that is the benefit of an operator when bringing in equity. You don't have as much risk in the deal because I see a lot of investors, they rush in and like I just partnered with this person. I'm like, oh, cool. How'd you meet them? I just met him at a meetup group. What deal did you buy? I don't know. Yeah, they had good numbers. I was like, what? So where did you look at the number? And then I, I get curious like, how did you vet the numbers? And they're like, oh, well, he's just done this a lot. And I'm like, oh no. Like it's. And maybe they have. But you have to understand what you're sending money on.

[Dave Meyer]

Oh, totally. Yeah. That's scary because numbers, I mean, investing is about assumptions. Right. It's like the calculations are easy. It's about what, what you assume is going to happen. And you could be way off on that. And you can make your assumptions look great, but they could be completely wrong.

[James Dainard]

Yeah. And that's getting to know your operator before you fund them. Like, how do they look at investments? You know, I mean, you have talked to a lot of operators in your career. I know that some, they like to put some juice in their Performa.

[Dave Meyer]

Yes.

[James Dainard]

And you'll look at like three deals from them. You're like, yeah, the Numbers are, everything's at the best case scenario.

[Dave Meyer]

I like the pessimistic people. I want to hear people who are like, yeah, this probably won't go well.

[James Dainard]

And as an operator for me, I like to be pessimistic because it's easy to under promise and over deliver. That's the easiest conversation you can have.

[Dave Meyer]

Yeah.

[James Dainard]

When you over promise and under deliver, it sucks the life out of you too, as the operator.

[Dave Meyer]

Oh yeah.

[James Dainard]

And it is not worth it. And so like all these operators out there, be conservative. If you're conservative, you're protecting your investor. And I'd rather go to you, Dave, and go, hey, look, I got this deal and you can make 16% on it. It's a quick deal, it's easy, there's lots of upside. Because like our flip off house in Kent. Yeah, it double like, and I, I knew I was being a little conservative, but not that conservative.

[Dave Meyer]

Yeah.

[James Dainard]

And as long as you do that, it makes everybody's lives easier. And you prevent issues and you prevent legal issues as well.

[Dave Meyer]

Personally, this is how I operate my investing business. Regardless of whether it's a partnership or not. I always want to look at the word like not the worst case scenario, not like a 2008 scenario, but I want to. I underwrite for low growth, low, lowest possible outcome. And usually I'm wrong and something better happens. Like the flip house, the game house that we invested in. That's a good example. Like you set my expectations lower than you thought and then I was delighted. I do the same thing when I underwrite a rental property.

[James Dainard]

Right.

[Dave Meyer]

Like I underwrite for low growth, for high expenses, for low appreciation, for low rent.

[Ashley Care]

Growth, growth.

[Dave Meyer]

And I'm usually wrong on the upside. Right. Like there's usually more upside in a deal than the way I underwrite it. But I like only executing deals where if things go like pretty badly, I'm still comfortable with the deal.

[James Dainard]

Yeah. And then it's like, how do you find that on your operator? And so that's where you can ask those questions. Like if an investor that we're talking about doing a deal and they want to ask me, like, hey, you're projecting this to take, take seven months, eight months. Can you show me the last five deals similar and how long they took.

[Dave Meyer]

And what if they say no? Or I think they probably wouldn't say no, but how would you evaluate their response? You know, like what would a good response look to you for that? Like what, what kind of documentation, what kind of evidence should they bring to you?

[James Dainard]

Well, and that on the operator side, if they're asking me for a million things about that, I'm going to be like, okay, you don't trust me at all. But I mean, if someone can show me you on a tax record when they bought it, when they sold it. You know, typically as I get to know an operator too, or even getting to know an investor, I'm trying to set those expectations. I send them over pictures of what we do as well. Like here, here's an example house, because I want them to know too, like, what is our talents, what is our skill sets. Because everybody flips properties different depending on the market. There's some houses that, the way they do it in a different, different part of the country, that we can't do that in Seattle.

[Dave Meyer]

Right.

[James Dainard]

And the way we do in Seattle won't make any money in those other parts of the country.

[Dave Meyer]

Yeah, it's a pretty unique place.

[James Dainard]

And so asking for those things, there's nothing wrong with asking for proof. And if, if an operator won't give that to you, I, that's a red flag. But the same red flag is if you're going, hey, thanks for those dates. Can you send me your PNLs? Can you send me every invoice you, you spent? Yeah, like, if you're getting too deep on me, I just don't want to deal with it. It's not that I won't show my books. It's just like, I don't have time to answer this many questions. Questions all day long. We got things to do.

[Dave Meyer]

But to your point, like when you were starting out, you would have done that for sure.

[James Dainard]

Because, you know, when we're new, you know, and we all start from the same place, right? Like it's. I got in this business as a wholesaler, less than 15 grand in my bank. Didn't know what I was doing, but I wanted to learn, right. And so I was willing to give away a lot just to learn and get. And that was the best thing I ever did.

[Dave Meyer]

Yeah, yeah.

[James Dainard]

But I would have done whatever it took to get that money. And when I invest with people, I always let them know the vetting process is the most gnarly. After that, they won't hear from me much.

[Dave Meyer]

Yeah, exactly.

[James Dainard]

And because you really have to see, because people can say a story, but you got to know the story.

[Dave Meyer]

Right?

[James Dainard]

And you know, if it's a newer operator and they're on project number six, project number, maybe even project number one, I don't want a budget. I want a construction bid. I want to know what the actual costs are that are going in this house because they don't have the experience to kind of narrow that cost down. Whereas at our company, we've been now, as we've done this for a long time, we make the bid, give it to our contractors and negotiate, and we make that bid based on the pricing we know that they'll do it for.

[Dave Meyer]

Oh, that's. Dude, that's such a flex to be able to be like, I know, I know what this costs. I'm going to give you your own bid.

[James Dainard]

Well, that was that budget we sent off to you.

[Dave Meyer]

Amazing.

[James Dainard]

And I think you have to verify those numbers. Right? Like. Like, I know, I know you don't vet my deals probably as thoroughly as maybe someone, but you love looking at the numbers.

[Kathy Fecky]

Oh, it's the best.

[James Dainard]

And as a passive investor, the more you understand those numbers, you have to see what's the brick and mortar budget of 250is. Well, what's going into it? What if that operator's spending 250, but they're not even adding a bathroom?

[Dave Meyer]

Right, Exactly.

[James Dainard]

So you have to know what they're doing and not doing. And that's the cool thing about what you're going to do on this project right now, is the more you know, the more returns you're going to be making because you know who to invest with and not to.

[Dave Meyer]

Yeah, absolutely. I'm way far behind, but I'm so impressed by your ability to just like, name off what anything should cost. You're like, oh, like, like adding a bathroom should cost this amount. You know, a new. A new kitchen X amount per square foot. That doesn't come easily. I'm so impressed that you could do it. But I want to get at least closer. Like, that's my. One of my main goals for this is to really just be able to sort of benchmark expenses for construct and get better at that because it allows you to vet deals, vet, operate it so much better. Even if you're not doing it yourself. You have to have at least like a little bit of a baseline here. And that's what I'm hoping to learn from you on this project.

[James Dainard]

Yeah, I mean, the construction is the brick and mortar to all this. Lending partnerships. That's the component that tells it whether it's going to be profitable or not.

[Dave Meyer]

Well, I could talk to you about this all day, but we are meeting up on Monday to talk about this more. So I think we should get out of here. But this is a great conversation. Thank you for including me on this deal. I'm super excited about it. I'm going to think I'm going to learn a lot and we'll take you all along for this ride because I imagine that there are a lot of people out there, like I said, like me, who don't necessarily have the construction chops or the time to run a flip, but are eager to get in and have a chance at some of the huge upside that is available from these value add projects. So we'll take you along for the ride. And James, thanks for being the teacher on this one.

[James Dainard]

I better look good so that's extra pressure for you. We gotta hit this deal right or this is not gonna be good for me.

[Dave Meyer]

Yeah, it's a good thing we're recording this before we know what happened, so it puts a little bit of pressure on both of us to make this thing happen. But I have full confidence and either way, we'll learn something.

[James Dainard]

Yeah. All right, let's go walk this site.

[Dave Meyer]

All right, well, we'll put that up on YouTube, so make sure to check that out if you're curious about this house. And that's what we got for you today. So thanks so much for listening and we'll see you again soon for another episode of the BiggerPockets podcast. Thank you all for listening to the Biggerpockets Real Estate Podcast.

[Ashley Care]

Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify.

[Dave Meyer]

Or any other podcast platform.

[Ashley Care]

Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calico, content and editing is by Exodus Media. If you'd like to learn more about real estate investing or choose sign up for our free newsletter, please visit www.biggerpockets.com.

[Henry Washington]

The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk, so use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose, and remember, past performance is not indicative of future results. BiggerPockets, LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.