← Escaping the Drift with John Gafford
Escaping the Drift with John Gafford
From Corporate Retail to Real Estate: Eric Hughes' Journey and Strategies for Success
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Hey, it's John Gafford from the Escaping the Drift podcast. And big news. My new book, Escaping the Drift is coming out November 11th. You can pre order it right now at thejohngaffer.com There are tons of bonuses, tons of giveaways. Get the book. If you are somebody that feels like you might be drifting, drifting along, this is for you. If you know somebody that feels like they might be drifting along, this is for you. Available everywhere, all bookstores, every everywhere, Amazon, Barnes and nobles, the whole nine yards. But pick your copy up right now at thejohngaffer.com and get a bunch of the awesome bonuses I've thrown out. Because I promise you, I put my heart and soul into this thing. I want it to help you change your life. Pick it up everywhere. All right. Red states or blue states.
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For my investing.
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Yep. And now, Escaping the Drift, the show designed to get you from where you are to where you want to be. I'm John Gafford and I have a knack for getting extraordinary achievers to drop their secrets to help you on a path to greatness. So stop drifting along, escape the drift, and it's time to start right now, literally back again, back again for the podcast, like it says in the opening, gets you from where you are to where you want to be. And today in this studio, folks. And this, the reason I'm saying this like this is because literally we just did about eight minutes without hitting record. And if you're in the podcast business, that's the kind of things that happen sometimes. But today we're lucky to have in studio. This is somebody that is a Harvard educated gentleman, which I think is very, very impressive. He very quickly rose through the ranks in the corporate retail world, but left it all behind for something better, which was investing in real estate. He is now the founder of Rental Income Advisors. Ladies and gentlemen, welcome to the program again. This is Eric Hughes. Eric.
- [03:37]
C
Hey, John.
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A
We're doing this again, man.
- [03:39]
C
Can't wait.
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A
So, you know, the good news is, is all the secret sauce that you just spilled about how to become a billionaire, we're going to talk about it again as we go through it. So let's talk a little bit more about your early life. Yeah, so get. Tell me that.
- [03:54]
C
Yeah, so nothing crazy, you know, grew up just outside of New York City, went to school and from the work standpoint was got. It was doing vector marketing, which is the, the Cutco.
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A
Right, The Cutco knives.
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C
Cutco knives. So, well, I want to tell you.
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A
So how did you get into Cutco Knives? What was it about that that made it appealing to you?
- [04:20]
C
It wasn't appealing. It was, it was scary. It was not fun, man. It was, it was for me. It's. It was hard. I think for a lot of people. It's hard. It's tough work to put yourself out there. Direct sales capacity. So how did I get into it?
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A
I don't know.
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C
I got recruited. I flyer somewhere for a summer job and I was looking for a summer job and went in and went through the process and.
- [04:40]
A
And that was the one. For those of you don't know, Coco knives is like direct consumer, like, you know, referral bang of doors. It is, it is. It's grinded out. It's no net, there's no Paycheck, not really what you kill.
- [04:53]
C
Yeah, you're. You're in there making a sales presentation directly, essentially at someone's kitchen table and showing off the knives and then trying to. Trying to get them to buy.
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A
And you were doing this on the summers while you were at Harvard, correct?
- [05:05]
C
Yeah.
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A
Okay, so what was the most. What was the most you ever made?
- [05:10]
C
Selling cocoa knives as a student?
- [05:13]
A
Yeah.
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C
Oh, as a student? I don't know. I can't remember. I really don't. Ten grand a summer.
- [05:24]
A
Okay.
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C
Something like that.
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A
Were you on scholarship. Do you have scholarships at Harvard? No. Okay, cool. Did you leave with debt or were you paying it off as you went along?
- [05:31]
C
I was lucky enough to have parents who could pay.
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A
God bless them.
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C
Yeah. So I was avoided student debt and all of that. See, I was lucky.
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A
I say that. And now I'm that parent that's probably gonna have to write that check soon. Yeah. So.
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C
And you're like, I should have made less so I could get financial.
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A
No, well, no. Well, no, no, no. Believe me, I would much rather have to write the check. But again, like, we, you know, like I was saying the thing about Harvard. So, yes, your parents paid for. That was amazing. Like, anymore. For me, college is about the network you make. And my son is applying to Harvard. It's one of the schools on all the Ivies are our top level. So we have our top level, the Ivies, and then below that we have like, smu. We have usc. We have schools where like, all the private offices come out of all the family offices come out of these schools, and that's level two. Because for me, going to college is really just about the network anymore. I mean, unless you're going to become a brain surgeon or something really, really specialized that you have to have those degrees, it's really about just making connections. So again, other than the Cheesecake Factory job, would you say that the Harvard connections have been worth it over your life?
- [06:38]
C
Yeah, I would say so. It doesn't. Doesn't hurt. So, you know, I think there's. There's two things. There's the people you meet there and not just sort of networking from like, say an older person who's going to provide opportunities. That certainly happens too. Just the people who you end up going to school with and meeting. I'm still very close with a lot of people I went to school with. And that's a good network, you know, because you're. You're dealing with a lot of people who are, you know, likely to do interesting things and, and Be successful in different fields, which is pretty cool.
- [07:07]
A
So random question about Harvard just because I'm curious. Because he's applying there. The people you're friends with now, are they the. Because you have to, you, you get, you, you get moved into a house there and that's pretty much where you live. That's your thing. Right. And it's like Hogwarts a little bit where you, I mean it is fair comparison.
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C
It is so.
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A
And then there's other organizations around that. Would you say that your friends are more from the house that you lived in? Is that where all your long term friends are from or.
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C
It's both. I think everybody's experience is different. So I, I was very close. So what happens, you, you get placed into a small group, either a floor or an entryway depending on the building, as a freshman. And then you can move into a house with whatever group you decide to block with.
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A
Oh, that's cool.
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C
And then so our freshman year group was pretty tight and we went on to live together for the rest of school as well. So I'm still very close with them. But I also sang acapella and that was a big part of my experience. So I am close with a lot of those guys as well. So I think it's both. If you go there and you play sports, I mean that's who you're going to be.
- [08:06]
A
I'm instantly comparing you now to Andy from the office. You know. That's right.
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C
Yeah.
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A
Instantly making this comparison. Yeah.
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C
In the flesh. Right?
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A
There it is. Yes. I'm instant making that comparison. So you got sales experience with Cutco and, and you're self admitted. You're kind of an introvert.
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C
Yes.
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A
How did you, how did you. So how do you overcome that? Like how can introverts out there get into sales if you had to give them advice?
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C
Yeah, that's such an interesting question. So definitely an introvert. But I think it really was vector that, that kind of taught me how to do that. And I think for me it was learning the process.
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A
Yes.
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C
It was like there's a skill set here that I can learn that I can teach myself how to do. Right. There's a way to do this sales presentation. There's a way to influence people and make eye contact and use certain phrases that are going to create, you know, certain reactions in people. And that was all pretty interesting to me. Even if it was uncomfortable to like go and ask for the sale and do it. But once I sort of got into, I'm like, okay, you know, you know I just. I didn't want to fail at it. So, you know, I'm competitive in that way. So it was more about just leaning into the process and saying. And saying, like, I can go out there and do this and that. By the way, that skill set then helped me with interviews. It helps with public speaking. Right. Helps with being able to come on and have this conversation. Like so many other things in life sort of require that skill set. Even if you're somebody who, you know, is likes their alone time and likes their quiet time, which I do. So I think you can learn how to do both.
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A
Well, I'm so glad you said that, because so many people want to get into sales, and I've been doing this long enough with enough people that, you know, less than 2% of the population, if you take a disc test, right, that personality Test, less than 2% of the population has the high D high I, which is like Michael Jordan athletic ability in basketball, but for sales, less. Less than 2% of people have that disc. And then the other people that have, like, you know, you don't get it all right.
- [10:11]
C
You don't get it all right?
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A
If you have that desk, you're also a disaster with your paperwork, which is why you need good assistance to help you make sure that you're organized with everything behind you. But a lot of people that are like, oh, my God, I'm introverted. I could never sell real estate. I can never get into sales. I can never do that. That's exactly right, what you said. I've trained so many of these people, and as long as you give them a really detailed process, they're the ones that adhere better scripts and understanding. And you. Step A, you're trying to accomplish step B and then step C, and you're trying to move people through this gauntlet that's beneficial to them, but you're doing it in a way that makes sense. I find those people end up doing sometimes better in the long run than your high D high I. Because these people just. They depend so much on their personal flair that they start skipping around. Like, let's just skip to the end. Because I'm. Because I have so much belief in my own charisma that I can just skip to the end of this sale, and then they don't understand why it falls apart.
- [11:09]
C
I think you're right. I agree with you on that.
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A
Yeah. So. So if you're listening, man, hey, if. If you're introverted, you can still get into sales as long. But the. The. The important thing is get with a company that has great training and a good process. That's the important part of that.
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C
Yeah.
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A
Okay, so after Cutco, then what?
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C
After Cutco kind of left that abruptly with the sort of burnout. And then, as you mentioned, I worked for the Cheesecake.
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A
You were waiting tables.
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C
Waiting tables for a year.
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A
So here's. Okay, we got. I gotta ask this question, which is this. What's it? Harvard graduate waiting tables at the Cheesecake Factory.
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C
Well, I'll give you one guess what my nickname was. It was Harvard. It was Harvard.
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A
Yeah, it was Harvard. I was trying to think, like, there was that movie with, like, Joe Pesci and something, and I was trying to. I don't know. I don't know.
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C
So, you know, you get a little bit of grief about it, but.
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A
You know, were you comfortable enough in your own skin at that point in your life that you didn't care, or did it bother you a little bit?
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C
I didn't care. Yeah. I never. I never put. That's just where I went to school. Right. A lot of people externally put a lot of weight on it. And for me, it was like. It was a great school. It's where I went to school. I had a really good experience, but that was that. It's just a school.
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A
It's just a school. Okay, fair.
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C
You know, so, no, I didn't have any expectations or feel like, oh, gosh, this doesn't make any sense that I was here. Like, you know, my brother was sick at the time, which is another confounding factor. And so, like, it was just what I did for that time, and it was fine. And actually, like, waiting tables, it keeps you busy.
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Yeah.
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C
Keeps your mind going.
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A
I've waited. I've waited many a table myself, physically, previously.
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C
Exhausting. So much more so than people think.
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A
Let me ask you this question. Well, I love talking about this, too, because I talk about this in my new book that's coming out, but one of my friends, Eric, that I love, but when we go to a restaurant, especially with a lot of people, it's the pen. Right. And I find that, like, for example, you waited tables.
- [13:05]
C
Yeah.
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What is the goal of waiting tables? If you're a waiter, what's the goal?
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C
Tips.
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A
Right, Tips. What factor leads into tips?
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C
Service.
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Service.
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C
The predisposition of that person.
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A
Everything being right.
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C
Yeah. You got to get it right. Just. You can control what you can control.
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A
Right.
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C
And then people will tip what they tip sometimes.
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A
So when you were waiting tables, did you use a pen?
- [13:27]
C
I guess so. I think this is 20 years ago.
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A
Yeah, I know, but I'm just saying, I did not. I did not.
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C
Oh, as far as, like, writing down, I did not. So four top or more yes, less, no.
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A
Yeah. And here's the funny.
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C
But here's the funny I didn't want to forget.
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A
But here's the thing. I did not. Like, I was. I was one of these people that's like, oh, I remember.
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- [14:15]
A
Book now@vrbo.com because for some reason, like, I wanted to, like, impress these people how good my memory was when it had nothing to do with the equation of how much money I was making. And so often you'll go to a restaurant and my friend Eric will say this. So if you're a server, don't be mad at this. If there's a bunch of us, they'll say, hey, look, do you want to get a pen? They're like, no, no, I remember. He's like, look, then we're going to make a deal. I'll wait. We'll wait for you to get a pen. It's fine. But if something comes out wrong, we don't have to tip you right. And then they run and get a pen because it makes sense. And it just. It never ceases to amaze me how many people in that business, like, that part of the equation is irrelevant to everything that's going to happen. What, you make money, but it happens so frequently.
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C
Yeah.
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A
And I find it so strange. And for me, I know personally, I did it because when I was waiting tables, even though I was good at it and younger, I always felt like I should be bigger or more than I was. And so this was my way to kind of try to flex my brain power.
- [15:11]
C
Yeah.
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A
And I'll show you I'm not just a way. Yeah, but they don't get. They don't care. They could care less.
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C
I did it mostly at a convenient. Like, if you just have a two top, like, I'm not going to forget. So there was some when I didn't do that. But no, I was not, like, trying to show off I was, yeah, I'm.
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A
Free to admit my own stupidity. And that was, that was not this, that was not smart.
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C
Yeah, it was not smart.
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A
Use a pen. Use a pen. It's not hard.
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C
So anyway, I did that for a while and then I was hired by my first retail company which was called Stephen Barry's. This is going back in history now. They're not around anymore. But they were a big upstart, fast growing apparel company and they were selling collegiate license stuff. So like university T shirts and sweatshirts for real, real cheap. That was kind of their model.
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A
Not sustainable though.
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C
It was not. And I should have written a book about Stephen Barry's when I, when I had all the memories and left there. But it's, it's a bit of a wild story with how it all went down. But anyway, that was my first retail job and then worked many others over a course of 15 year career in the industry.
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A
Moving your way up the ladder?
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C
Yep, trying to move up. Moved up at Steven Berry's, then I was a district manager for Payless Shoe Source and then moved to Macy's. I was there for seven years, became a VP there. So just trying to learn various different skills along the way to be able to, you know, climb the ladder, you know, get the next promotion and make more money through that corporate.
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A
So what was the catalyst that made you say like I don't want to be in, I don't want to be in the corporate world anymore. Was there an event? Was it. Something happened? Was a gradual. What happened?
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C
It was sort, it was a little gradual and then there was like an event. Okay. So you know, you do get to the point where, you know, in any industry, but in retail for sure, where you realize that all, everything you do, all your problems that you're trying to solve, all your new software that you're trying to put in, all, all the people you deal with is all in the service of selling 1% more jeans, you know, and that can last I think maybe only so long. Unless for me anyway. Yeah, it's probably different for everybody but for me it's just kind of like, oh, wow, okay.
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A
Just weren't really feeling a mission behind your work.
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C
Right. There's not a lot at bottom, you know, in the, in the retail industry. It's, it's a fascinating industry and there are interesting business problems. So like on that level it's cool. But were you aware back.
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A
I'm just curious this, Were you aware back then of like the T shirt dumping in like these countries in Africa? I've seen. I didn't know this was happening. I just saw this on Dateline not too long ago.
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C
I'm talking about like returns or waste.
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A
No, where they take like all the, like, like people give all the stuff to Goodwill. Right. You think that it gets, you like to think that it gets recycled and people buy it and they do this when really they just package it all up and ship it to these countries in like northern Africa and just drop it off. Yeah.
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C
So as far as like donations and stuff, I want. I don't know if I was aware of that, but I actually was aware. I worked. One of the big business problems I worked on at Macy's was returns and how stores could deal with returns and how the company could be more efficient with returns because there's a lot that just essentially gets trashed. So it's a big financial problem for a retail company. They want to try to recapture some of that. But it. Yeah, external to the company. That's a big environmental problem as well.
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A
Who knew?
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C
Yeah, get. You know, we make a lot of clothes and we throw away a lot of things.
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A
Didn't mean to make you part of the evil empire there. I was just curious if that was something that was going on back then. Anyway. So keep going. So what was the, what was the event?
- [18:48]
C
So the event was. So I had had a good run at Macy's but kind of got stuck in a position and didn't see a path to the next thing. And so I went out and with the idea that I would get a job at a smaller company where I could take a lot of the sort of, sort of more industry leading expertise that I had for Macy's and apply it in the context of a smaller company. So become the bigger fish in a smaller pond. Sure. And this actually worked out pretty well. I found a job that basically fit the bill at the children's place. But it turns out the company culture was, let me just say, not a fit. So the CEO at the time had a particular way of doing business that didn't agree with me. I'm going to try to not malign any individual here, but it was not a good place to work. And so once I realized that after four or five months there, I was just like, oh man, I can't stay here. And just the thought of going out and looking for another job. So that's when I really got hyper focused on, okay, is there a way out of this game? And started to research ways that I could take the savings because I've been saving. Right. I Was pretty organized, pretty diligent throughout my whole career to put money away and, you know, to try to, you know, build my own nest egg so that I could have some more options in the future. So, so the thought was, okay, is there a way that I can redeploy all this money in a way that will give me some cash? Right. So replace some of the income that I would lose if I left the office. And that's when sort of this cash flow rental model appeared to me.
- [20:31]
A
Where were you living at the time?
- [20:33]
C
New York City.
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A
You're in New York City?
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C
Yeah, I lived in New York City all my life until a year ago when I moved to the D.C. area.
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A
Okay, so you decide you want to get into cash flowing real estate? Yeah, I would guess New York City is a terrible place to do that.
- [20:46]
C
It is, yeah. I had, it's not, there's no cash flow in New York. I actually had, had done some real estate investing in New York, but not for cash flow. So, so my, this actually goes back to Macy's. So I, my, my first sort of spark for real estate was, you know, we were standing around one day, I still remember, like with the team, and one of my colleagues was say, was saying, oh, you know, I have a rental condo where I used to live and now I rent it out. And I was like, huh, that seems like maybe that's a good idea.
- [21:19]
A
Yeah, maybe I could do that.
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C
It seems like something, you know, like rich people do that. Right? I should think about that. And so I ultimately ended up buying a few condos in the outer boroughs of New York City. So pretty cheap by New York standards type condos. But the goal there was just to not lose money on the, on the cash flow.
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A
What year was this?
- [21:40]
C
First one I bought was 2012.
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A
Okay, so out of the Great Recession, pricing was still relatively good. The hedge funds hadn't completely started swinging their big bats around. Well, they were just starting in 2012. I was buying stuff for Goldman, I guess, at that point. So, yeah, they were already full swell swinging the bats, right?
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C
Yeah.
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A
But not New York. I don't think they were buying that market. So you picked up your first couple of units. How'd you find them?
- [22:07]
C
With an agent. So working with an agent in New York and saying, okay, here's what I was looking for. I think I was using Zillow or whatever the equivalent was as well. And so I bought in like new buildings, primarily small, like 400 to 600 square foot units. And I, the theory was that I was a New Yorker for a long time. So I had insight, you know, I would be able to pick the neighborhood, the market market or the block or the building that was going to appreciate.
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A
Oh, you were playing. So you were.
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C
Okay now because this is the two schools, Right.
- [22:43]
A
Were you okay. Were you underwriting this for. So you're underwriting for IRR is what you're doing. Correct. Not for cash flow.
- [22:49]
C
Not for cash flow. Yeah. My, my goal was cash flow neutral.
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A
Okay.
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C
But I, I talked to my clients a lot, sort of about, you know, there's, there's basically two schools in real estate for individual investors like me. Right. One school is cash flow doesn't matter that much and you get rich on the appreciation anyway. Yeah. Therefore the game is you got to find where the appreciation is going to occur. And so a lot of people spend a lot of time thinking about what's the right inputs and algorithm to be able to predict, you know, where that price appreciation is going to occur. The other school of real estate says that's all nonsense because nobody can predict it. Yes, you do make money through appreciation and particularly if you can get a low of mortgage over, over time that's going to amplify your returns with, with appreciation. But nobody can pick, it's a black box. Right. Nobody can get in there and say oh, that's the one that's going to go up double everywhere else. Sure. So we lean into those long term fundamentals with you know, slower appreciation assumptions, inflationary appreciation assumptions. But the thing you can control is cash flow. Right. You can look pretty easily and say you cannot do cash flow in New York, but you can do it in Memphis, which is where I ended up buying my cash flow properties. So that I'm in the cash flow school, obviously.
- [24:01]
A
Yeah, I, I tend to agree with that. Like Vegas anymore. Like you can't cash flow here. It's impossible.
- [24:06]
C
Yeah.
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A
We'll still buy property here sub two, because I liked. I mean I'll buy as many 3% mortgages as I can get. But you still can't cash flow.
- [24:15]
C
Yep.
- [24:16]
A
So it just, you know, you can midterm, you know, if you can get a good short term. But that's even, that's really gotten difficult here and short terms. I mean, I'm sure you agree we'll talk more about that if you've ever.
- [24:26]
C
Gone down that difficult here because of regulations or supply nose. Okay.
- [24:30]
A
You really think they want short term rentals in Vegas?
- [24:32]
C
Hell no, I don't want them at all.
- [24:33]
A
No, you can't have them in Vegas. At all.
- [24:35]
C
Oh, so it is not allowed.
- [24:36]
A
Henderson's legal, but you have to have them. Yeah. There's a map and you have to be so far from another one. Okay. It's a little saturated, so if your house isn't pretty special, it's hard to do that. We converted most of the short term stuff that we had in the midterm and working with the insurance companies for displaced people when there's fires or whatever else. And that seems to be a good business. That's a really good model.
- [24:58]
C
New York took similar steps. Yeah. So you can't do short term in New York.
- [25:02]
A
Well, you look at, I want to say, and I was in Phoenix on Thursday and Friday last week and somebody told me there was 50,000 short term rentals in Phoenix.
- [25:09]
C
Seems like a lot.
- [25:10]
A
That's crazy. I mean, that's insane that there's that many there. I mean, there's just no way that that works. You just. There's just no way.
- [25:18]
C
And that's always been. Because I get a lot of questions on, oh, what about short term? What about short term? And apart from the regulatory concerns and risks and the work, which is. Because it really is a different model.
- [25:28]
A
It's.
- [25:29]
C
It's a hospitality model more than anything. I always worry about the supply because, you know, one of the things working for us as real estate investors is there's a natural supply constraint. Right. A lot of people will tell you we have an overall housing shortage and that helps us.
- [25:44]
A
Yeah.
- [25:45]
C
But if you just look at the short term market, there's no constraint. Right. More and more people can decide, oh, I want to go do a short term rental. And that actually has more or less been what's happening in the last few years. The supply is growing even though the demand is still growing.
- [25:59]
A
Yeah.
- [25:59]
C
Supply is growing faster. So. And like, there's no way to solve for that.
- [26:04]
A
Well. And that's a short term investor. Not to mention, though, you're also now at the mercy of like reviews. Yeah, well, yeah, you're at the mercy of the marketplace that like a buddy of mine was telling me a story where he had a short term rental and he's like, what? He finally threw his hands up because, like he rented out to a bridal party and there was like 10 girls all trying to plug their blow dryers in at the kitchen, at the kitchen island and it kept tripping the breaker. And so. Sure. Her review was like, you know, faulty electric in this house. And it was like, no, you can't hook up one. You know, you can't have an extension cord with 10 blow dryers on. It doesn't work that way.
- [26:38]
C
That's funny.
- [26:39]
A
And he was like, I'm done. Where are you with like the pad split stuff? Are you doing any of that yet or.
- [26:43]
C
No, no, no. Yeah, no, I do. You know, I tell people I do boring real estate investing. So very much sort of blocking and tackling type of approach.
- [26:58]
A
3, 2. No pool tile floors.
- [27:03]
C
Yep.
- [27:03]
A
Yeah.
- [27:04]
C
Indestructible convention. Right. So that's the property generally.
- [27:07]
A
What's the max age? 1981.
- [27:10]
C
So I go older. So yeah. So like in Memphis for example, where my portfolio is and in a lot of cash flow markets you're dealing with neighborhoods that were built before 1980. Right. So a lot of between 1950 and 1980. So quite a bit of my portfolio is there, although I have some newer ones too. But yeah, you're looking for in my book. Right. A house that's simple, that appeals to a lot of tenants, that you can get stable operations over time with long term, a long term approach and with conventional financing.
- [27:42]
A
Yeah.
- [27:43]
C
Right. So really discouraging my clients from doing, you know, more creative types of approaches with financing or anything else. Because even though those things work, Right. You can make those things work, but it's more effort in some cases it's more risk.
- [27:57]
A
Well, yeah. Clauses and mortgages make some. Yeah. And there's risk with everything.
- [28:02]
C
And for like the average investor who maybe has another job, who has a family, is busy and is just looking for a way to create some passive income, diversify away from stocks, etc. You don't need to get that creative. You can just go buy a house and operate it stably over time and you're going to get a. Get essentially all the long term benefits of this investing model which are significant. And that's sort of what I preach to people is like, you don't have to overcomplicate this.
- [28:29]
A
Are you trying to buy ready to go doors? Are you doing, are you improving both.
- [28:34]
C
Either one works. As long as you get to that stable rehab to stable place, you can buy it turnkey. I bought some full turnkey properties which is sacrilege to some investors.
- [28:46]
A
Nobody can't. Clothier does a really good job of that.
- [28:50]
C
Yeah. Actually I was in Memphis. I met with them.
- [28:52]
A
Yeah.
- [28:52]
C
Recently.
- [28:53]
A
Yeah.
- [28:53]
C
For the first time, said hello to them.
- [28:55]
A
So it's a savage. Yeah. Well.
- [28:58]
C
So it doesn't really matter if turnkey is good for people who, you know, are a little bit risk averse and just want to have peace of mind, but you can rehab as well. As long as you've got a professional property manager in place who can do that work, you can do it easily either way.
- [29:15]
A
Well, I met with a couple of weeks ago. I spoke at Five Star in Dallas. It's a default conference. And I was talking to this guy who's a vice president of rehab for offer Pad. I heard this. I don't know if you've heard this yet.
- [29:29]
C
So I buy it, right?
- [29:30]
A
Offer an ibuyer, right? So what they do. But they do, you know, they fix and fix about 4,000 doors a year. It's a lot. It's a nationwide massive operation. Well, since the market has shifted and rates are not that great and their money is. The cost of their money is expensive, they can't buy as many doors because the margins aren't there. So, you know Jeremy, who's the guy that runs their whole rehab wing, what he said was, okay, I spent 10 years building this rehab network and these guys were all work for us. And you know, they, they're loyal and they're there and they're fast and they're good and we're set up and I don't want to lose my guys because we don't have enough work. So what OfferPad started doing for investors is they'll come in now and they will bid. They'll bid you their pricing on flooring because they're buying million square feet of time right in the LVP and all that stuff. And you just can't get the pricing they get. So they'll build, they'll hit, like, here's our tan package, here's our white package, here's our gray package. Which one do you want for the house then when you buy it? So then they manage the project for you. Their people don't know if it's one of the hedge fund house or your house. They don't know the difference. They guarantee a thousand dollars worth of work a day to get it done. So if it's $27,000 rehab, it's done in 27 days guaranteed. And they're running it and I've got friends now doing this and it's now opened up so many other markets because, like, I'm sure you, you, you're aware that, you know the scariest thing about buying in another market is the trades. Like, where am I getting electrician? Where am I going to get a flooring guy? And you, you try to depend on, like you said, the good property manager in these areas. But what if you're wrong.
- [31:10]
C
Yeah, it's, it's the linchpin of the whole model.
- [31:12]
A
Yeah.
- [31:13]
C
To be able to do remote investing successfully you have to manage it well. For most people that's going to mean professional property management and that's what I've done. It's what the vast majority is. Totally worth it. Yeah. But not all property managers are created equal. Right. You've got good ones, you've got bad ones. I generally say look for somebody who's large, local and long lived. You know what is large? A thousand properties or more. My main PM in Memphis has 3500 plus properties. You can't do that.
- [31:44]
A
It's a machine.
- [31:45]
C
Right. You can't do that through grit. Right. They've got scale. It's just like offerpad does that they can create good leverage in their operations and they've invested in systems and processes and people and automation in order to make it all work. So you do need that. If you don't have that, you're not. It's going to be a rough ride.
- [32:03]
A
Yeah, we got rid of, we actually made a very difficult decision here, here about six months ago where we only had, we had three property managers here and we got rid of all of them just because we sell luxury real estate here. It's what we do. And then when you look at our Google reviews and it's like a one star review because a landlord kept somebody's like deposit. That's nothing to do with the property manager. Number one has to do with the landlord, not the property manager. And then two, it's bringing like we're trying to sell multi million dollar homes here and this person that lost $500 is giving my company a one star review. It's like that's not good. So we were like we don't make any money on this anyway. We got to get rid of this because it wasn't like 3,000 doors. But I have a friend of mine here in town, Sean, that's well over a thousand doors and he's got a well oiled machine and it's great.
- [32:50]
C
Yeah, yeah.
- [32:51]
A
So you've got to have that.
- [32:53]
C
You really do. And particularly in lower price rentals, operations are more difficult on average than, than in like a luxury rental property. So you got to have somebody who, who knows the market and knows the business and you do pay for it. And I have this conversation with people because a lot of new investors are tempted to self manage because they don't want to give up the fee.
- [33:15]
A
Yeah, you can't do that.
- [33:16]
C
So you say, oh, I don't want to give up the 8%, it's hurting my profit margin. So, you know, I've got 25 properties.
- [33:22]
A
And you want to sleep at night, what's that worth?
- [33:24]
C
Right. You know, so I tell them, Look, I've got 25 properties in Memphis. I'm going to pay my property manager Somewhere between 30 and $40,000 this year. And it's a great trade.
- [33:34]
A
Yeah.
- [33:34]
C
Because if you told me I had to do everything they do for $35,000, no chance. No, thank you. You know, so particularly if you want to scale and do it in a way that's mostly passive, you know, you self managing is just not an option.
- [33:52]
A
Okay, how do you write underwriter? New market and how often are you looking at new markets?
- [33:59]
C
So I'm not personally looking at new markets. A client might look in a new market. So when we talk about, you know, when I work with somebody, you know, I work one on one with people who are looking to get into this type of investing. So one of the first things we do is talk about, okay, where are we going to, where are we going to pick and look at the map. So the main things we're looking at are your cash flow engine, right? So your price, and that's generally your price to rent ratio and to a lesser extent your property tax rates. So if you want a lot of opportunity, a lot of different types of neighborhoods where you can make cash flow work in a market, it's generally where homes are cheap. Right?
- [34:34]
A
Yeah.
- [34:36]
C
So the relationship of price to rent, you know, and this is, I found remarkably true across markets, like a hundred thousand dollar home is going to rent for about a thousand, you know, and a $200,000 home is going to rent, not for 2000, for 1600. And a $300,000 house might run for 21, 22. And you can go up the ladder like this. So your ratio of price to rent is getting worse and worse. And that's what makes it harder and harder to get cash flows into expensive markets. So, you know, we look at the price to rent ratio, we look at the ability to produce cash flow. That's the main thing. And then there's some other factors that we might also consider such as your market size. Right. Because you want good, mature PMs who have lots of properties. If you go to a small market, you're probably not going to find that climate's a consideration. You don't want to say be in the path of a hurricane if you can avoid it.
- [35:28]
A
Well, Florida now With the, the new insurance laws with the roofs are just wild.
- [35:32]
C
Yeah, yeah, yeah, yeah.
- [35:33]
A
I mean you can't, I, I don't know how you can buy in Florida right now.
- [35:35]
C
I wouldn't, I do own a property there personally but it's, it's for my own personal use, not for investment.
- [35:42]
A
There you go.
- [35:44]
C
Landlord tenant laws are other thing you can look at in, in markets that, that is relevant and so on. But mainly it's okay. Is this the right type of market with the financial fundamentals to support cash flow investing remotely? Right.
- [36:00]
A
When you're looking at a deal or underwriting or revising a client is are you looking at dollars or percentages on cash flow return?
- [36:06]
C
Normally cash on cash is the main metric we look at.
- [36:09]
A
Yeah. And you're looking for a percentage return like what, what do you tell your.
- [36:13]
C
Students is a good deal if they're buying traditional upfront with a mortgage on a rent ready property. 5 to 8% in year one is where we're at now. It used to be 10% plus with lower interest rates of course, but so yeah, that's generally in that five high single digit range.
- [36:29]
A
Even on the bur strategy.
- [36:31]
C
No. So that if you do burr, you have other options. Yeah. So if you just say buy a turnkey property or some other rent ready property or an occupied property, which is pretty easy to do. That's kind of the range you're looking at.
- [36:43]
A
Yeah, that's what Kent does and.
- [36:45]
C
Right, exactly. Yep. So. And the long term returns are still great on this stuff. Right. So people are always like, oh, that doesn't seem like that much. Well, it's more than a dividend stock. It's more than putting in a savings account. So your cash flow is not.
- [36:56]
A
Dart's never going to go to zero.
- [36:57]
C
Not terrible. And yeah, your long term total returns are still in the, you know, call it 20% range on those types of deals. So still very appealing. Now if you want to do brrrr, you can do better. So this is for the uninitiated, where you buy the property, rehab it, rent it, refinance it and go and go do it again. So the promise here is that, that a, you can end up with less money in the deal so you could stretch your money further.
- [37:22]
A
Allows you to scale faster because you get your money back out of the deal.
- [37:24]
C
Yeah. So you can kind of recycle your money.
- [37:26]
A
Yeah.
- [37:27]
C
And you could end up with better cash on cash. Right. So depending on how that deal comes out, maybe you. In fact, literally just this morning I did A call with a client because he has been doing the burst strategy and I wanted to get into the numbers with him and share it with my other clients.
- [37:42]
A
Yeah.
- [37:42]
C
And so he showed me this deal and he ended up getting 20% cash on. Cash on what he left in that deal, which is actually still. He had, you know, like 25, 30,000 in the deal. Getting 20 on that.
- [37:53]
A
Yeah, it's amazing.
- [37:54]
C
So that was the best deal he's done. So he was happy, he was happy with that. But yeah, you can, if things go well, you can do better with the brrrr approach, which is why a lot of people like that.
- [38:05]
A
Let's talk about. I'm. Obviously you're not an accountant, but you probably talk some tax strategies with your, with your students as well.
- [38:12]
C
I do, yes. With the caveat that I'm not in a. Of course.
- [38:15]
A
Talk to your own cpa. We're not giving legal advice. We're not doing that. We're not giving. Yeah. We're not doing finance advice, but yeah. What, what, what tax strategies are you advising that again?
- [38:27]
C
Right, so the boring basics come first, which is that one of the appeals of cash flow investing is you end up paying very little tax on the cash flow you produce and that's mainly because of depreciation. So, you know, and I've got long articles that go into the details, you know, on my site for all these topics. But so just to give an example for me, right. So my portfolio this year will generate, call it a hundred thousand or so in cash flow that I'll put in my pocket. What do I pay taxes on? Like what profit do I actually say, oh, this is what I owe taxes on. It ends up being, I don't know what it's going to be under 20 because depreciation wipes all of that out. So this is not a tax strategy. It's built into the system, but it's hugely advantageous because now I can take that money that I would otherwise have paid in taxes and reinvest it or spend it on groceries or, you know, whatever I need to do with it.
- [39:23]
A
You ever do a cost seg report on any of your single families? No. No. Not begging it. Well, they're just, they're so small.
- [39:29]
C
They're so small. Yeah. I mean I've had this question asked by a couple of clients. I've never done it. But the problem is the, the cost segregation study. The cost of it is, is prohibitive.
- [39:40]
A
To a smaller product.
- [39:41]
C
Yeah. When you're looking at a hundred thousand dollar home, it's like, okay, what is how much juice is really in this orange and is it, is it worth it?
- [39:46]
A
To me, it depends on how much remodel you're doing though. If you're ripping the roof off because you can, you can, you can depreciate that roof that you can take, take a loss on the roof you're taking off and the new one you're putting on. Yeah, it just depends on how much work you're doing. But yeah, if you're buying a hundred thousand dollar homes, you're going to spend two grand to get it. I mean, any type of a decent roof report.
- [40:04]
C
Exactly, exactly. Yeah.
- [40:06]
A
And the tax savings probably wouldn't make it there anyway. So what mistakes do you like? I'm assuming some of your students come to you because they've screwed this up sometimes.
- [40:15]
C
Yeah, yeah.
- [40:16]
A
Most times people start looking for a mentor when they're like, whoops, I just lost a bunch of money. What, what mistakes do you see the rookie investor making out there?
- [40:30]
C
So I think it would be in a couple of categories. So one is just, you know, lack of discipline when it comes to their buy box and their strategy. Right. So like what am I buying and why? So there tends to be a little bit of shiny object syndrome in real estate because there's so many different ways to invest. Right. So you can get somebody who says, oh, I've got, you know, two houses here and one over here and then I have a short term rental over here. And also I'm curious about syndication and this RV park and, and I'm just going like, okay, wait, slow down, pick a lane. We're way out over our skis here, right? Yeah, pick a lane. Like what, what are we going to do and why? And then let's go down that path the right way. So I think that's definitely one of the biggest problems with new investors navigating real estate is be developing that discipline and just that confidence in the strategy that they're doing to not be constantly second guessing and looking over their shoulder and saying, oh, they're, there's a better strategy. I missed it. You know, there's a, the next best thing.
- [41:32]
A
Yeah.
- [41:33]
C
So just helping them to be calm and confident that this is a good approach, it's accessible, it fits well for a lot of people's lives. And the numbers are still really, really good. Right. You're not, you're not leaving a lot on the table here. You're still, this is a good way to build wealth over time and stay.
- [41:49]
A
In state like single family Homes. I like that. Just for new investors. You talk about like syndications and dude, multifamily syndicators are getting murdered right now because the debt that they, they knew the interest rates were going to be in a place where everything was going to be fine in three years. And we're here, those balloons are up and they don't, they cannot refi these projects. Yeah, you're seeing it, I mean in the office sector, in the commercial sector, I mean you're seeing it everywhere.
- [42:12]
C
And that's the risk you take when you get into syndication. You give a lot of control and no matter what they tell you on their, on their white paper, on their, their PowerPoint presentations, it doesn't mean that that's what's going to happen.
- [42:23]
A
So you're speculating the debt market.
- [42:25]
C
Yeah.
- [42:26]
A
You're 100% speculating the debt. It's worse than speculating the real estate market. You're speculating the debt market.
- [42:31]
C
So I'm a big proponent of direct ownership.
- [42:34]
A
You control your deal. At the end of the day, if it goes south, there's no one to blame but you because you did the wrong thing. I prefer that.
- [42:41]
C
Yeah. And there's a way out. I mean it may not be a comfortable way out, but you can always sell a property. If you're in a syndication, you know.
- [42:50]
A
You'Re, you're stuck, you're stuck, you're stuck. So interest rates, I think, you know, they jacked, they went up a little bit at the end of last week, but earlier last week they were to 3 year low and I think 6.31 I think is where the standard rate was. What is the, what is your avalanche number? When rates gets this, it's going to be an absolute, just mayhem shooting gallery again. What's that number?
- [43:13]
C
Meaning how low do they have to go for people to.
- [43:16]
A
Yeah.
- [43:19]
C
I would say, you know, probably another full point would be enough to, to make a huge difference.
- [43:26]
A
My number's 55.
- [43:27]
C
Yeah. Okay. So even less when it, when it.
- [43:29]
A
Gets to 55, when it gets there, it, it's going to be insane.
- [43:34]
C
Yeah.
- [43:34]
A
And the reason being is I think you've got this pent up demand through the market of people that would love to do something and want, maybe they've had a baby, maybe they've got, and maybe their kids have gone, they want to downsize.
- [43:44]
C
Yeah.
- [43:44]
A
But they're golden handcuffs to this 3.15% mortgage for sure. And they'll swallow five, five main, swallow seven.
- [43:52]
C
Yeah. You know I get into a lot of data you know, in my, in my writing and on my site. So one of the lock, in effect that you're describing, right, People locked into mortgages, One of the interesting things is that even though mortgage rates have been high over time, there are fewer and fewer people with like, sometimes you still have to move, right? Some, you know, if you don't have a choice. And that applies to a lot of people. So there is still a gradual change in the mortgages that are out there, right. Every month there's fewer people with the lowest rates and more people with the higher rates. So there is that gradual thaw that will eventually kind of normalize things. But yeah, I don't think it would take too much more and I see this even by the way with investors. Right. Of course it applies to owner occupants, to homeowners, but investors, it's the same thing they might, you know, have picked up in the like a clients of mine picked up a few properties three, four years ago and then kind of just been sitting around a little bit watching the market, you know, and waiting for the perceived better moment. Not that I subscribe to that thinking so much, but so yeah, if the rates continue to drop, it'll, it'll make a difference for sure.
- [44:57]
A
Let me ask you this as an exit strategy, right? Or a long term strategy, what are your thoughts on seller finance or lease to own? All your thoughts there. Because like my friend Cody Sperver in Arizona kind of was just murdered with this and did so well with it. But he loved to put somebody in on a small down payment on a lease to own because the tenant would stay there forever. And if they couldn't buy it at the point that they were there, he would just say, okay, cool, give me another five grand, I'll sell you another option.
- [45:29]
C
Yeah.
- [45:29]
A
So he never turned his tenants over. It just seemed like it went out forever. Some people did close, right? Some people did, but the people that didn't would just stay and they would continue to just buy option after option and they just like, I'm good. You did very well with it. What's your thoughts on that strategy?
- [45:46]
C
Not really for low price rentals, you know. No, same thing, same problem. I did actually try this, you know, those condos in New York that I used to own. So I tried, you know, at least to own situation with one of the tenants there. Ultimately we couldn't agree on terms and it didn't pan out. But in that situation it can work, right? When you've got a property and a tenant base where that is at least A reasonably likely outcome could work with lower priced rentals. It's just not really going to end that way almost all the time. That's the reality. So, you know, most of my tenants are poor and working class. They don't have savings. They need a place to live. But is lease to own going to be appealing to the vast majority of them? No.
- [46:30]
A
What's your absolute no go for buying a property? What is somebody like? Nope, I'll buy that. Other than the obvious, something sitting on the coast in a hurricane path or.
- [46:39]
C
It'S property like within a market. Like if I'm in Memphis, too big won't buy it. Certain neighborhoods won't buy it. Flood risk won't buy it. So flood factor, great tool for looking at individual flood risk at a property. So always do that. If there's flood risk, I won't buy it. Dude.
- [47:02]
A
I had a friend of mine went to Houston and after that her big hurricane there, this is now six years ago, bought a bunch of houses there, not realizing that there's floods. There doesn't really need to be a hurricane to flood. And he bought a bunch of houses. I was fixing them and then they all flooded again.
- [47:18]
C
Wow. Yeah. And this is why.
- [47:21]
A
Absolutely killed.
- [47:21]
C
You just want to avoid it, you know, even if you have flood insurance, which is expensive, you don't want to flood. I mean, as an investor owner man. No, that's one of the worst case scenarios.
- [47:33]
A
Water's the worst.
- [47:35]
C
Water is the enemy.
- [47:36]
A
The worst. The worst. All right, Red states or blue states.
- [47:42]
C
For my investing.
- [47:43]
A
Yep.
- [47:44]
C
Mostly red states.
- [47:45]
A
Yeah. I find that the, the landlord tenant laws seem to be better. The property taxes are usually less.
- [47:51]
C
Yep. In most cases. Texas being the exception.
- [47:54]
A
Texas is. Yeah. 3% is dreadful. Property taxes are.
- [47:58]
C
Yeah. So cash flow markets, you generally, you know, where are they? They're generally. If you take sort of a strip of the country from the Great Lakes to the Gulf, that's where they are for the most part. They're not on the east coast, they're not in the mountain and west.
- [48:10]
A
Right through the middle.
- [48:11]
C
Right through the middle. So from Detroit and Cleveland all the way down to Pittsburgh, baby. Pittsburgh, you know, St. Louis, Kansas City, Memphis, Birmingham and many others sort of in those areas. And those are mostly red states at the moment.
- [48:27]
A
Right through there. All right, so if somebody wanted to get in this before you got into investing, what do you think somebody would need to have as far as capital? What would you say is the bare minimum you should have before you start even thinking about doing this?
- [48:41]
C
At least 50,000 okay. You can buy a cash flow property without any normal loan at closing on a turnkey property for, you know, 35,000 invested, maybe 40. So it's enough to buy your first one with a little bit of a cushion. So seems like enough. Yeah. It's better if you have more scale is one of your friends when it comes to this type of investing. Because any one property can go sideways hard. Yeah. And so it's better to have more so that you know you've got some insulation. But yeah, 50,000 or more that you have ready to invest.
- [49:18]
A
Yeah. So I would say that first house has got to be a burr house and you might need a gap funder where you could come in and have somebody loan you on the, the gap. For those of you don't know what that is, like there's your primary loan which if you get a burr, it's probably going to be hard money. So you're going to go to like a fix and flip company like Kajabi or like my friend Tim's company, turn us in Texas and they're going to loan you the money to buy the house and then to rehab the house and they're going to dole out the money slowly based on the amount of repairs you make. But you do have to have some skin in the game there. They want some, they want some of your money in that game. But the loan is really based on the after repaired value of the house, not the current status of it. But you still got some skin in the game. But if you're like listening to this and you're like, well, I don't have 50 grand. Where am I going to get 50 grand? This is what I tell everybody about real estate and I will tell everybody this thing today. If you find a deal, the money will find you. You'll. You can find the money. If you have a, if you can find the deal and it's like this is really a deal, you won't have a problem finding somebody that can give you the money. And then if you do the birth strategy in that first one, you take somebody as a gap funder, which is that second position, they loan, they're your investor partner and now you fix it. And then when you pull the money out at closing, once you've improved it and refi it in a long term traditional debt or DSCR debt, if you want to do it that way, when you pull that money out now you pay your investor off and now you keep the asset. So he got his return or she got their return on that just the loaning you the money, which is cool. I buy a ton of those notes.
- [50:43]
C
Yeah. So like do you need 50,000 to start? No. As you pointed out, there's a lot of different ways you can skin this cat and get into the game. But again, I'm boring as sexy in my book. So like for most people who are looking to real estate as an investment vehicle and not it's garage slow. Right. Our career or a job. Right. Then most of the time it's better to have money ready to go. So you know, what mistakes do people make sometimes getting in over their heads with those sorts of debt vehicles and approaches that they don't fully understand. So it carries a little bit more risk to be leveraged in that way. A lot of people make it work and, and do really well obviously.
- [51:32]
A
But they also, but a lot of people think, oh, I couldn't raise 50 grand, but yet they have this 401k sitting there. They don't realize they can self direct their 401k through my buddy Greg Hurling's company and they can self direct their 401k. And you can use that to buy real estate. You can, you don't have to invest in, in, you know, Microsoft. You can buy whatever you want.
- [51:50]
C
That's true.
- [51:50]
A
So yeah.
- [51:51]
C
Yep. Yeah, I've had, you know, clients buy of self directed IRAs.
- [51:54]
A
I love that. All right, well if they want to find you, how do they find you?
- [51:57]
C
I'm@rentalincomeadvisors.com you can read all the blog stuff, you can get in touch with me and if you're interested in coaching, you can schedule a consultation and we'll talk about it.
- [52:06]
A
Dude, love it. Thanks for coming in. Listen, if you listen to that today, I preach it all the time. If you want to get wealthy in this world, real estate is the way to do it. If you are scared to go out and do it on your own, there's a dude that can help you. Right. The information is out there. People are willing to do it, but you've got to take control of your life and take the step to get where you want to be. Hey, it's John Gafford from the Escaping the Drift podcast. And big news. My new book Escaping the Drift is coming out November 11th. You can pre order it right now at thejohngafford.com There are tons of bonuses, tons of giveaways. Get the book. If you are somebody that feels like you might be drifting along, this is for you. If you know somebody that feels like they might be drifting along. This is for you. Available everywhere. All bookstores, everywhere, Amazon, Barnes and Nobles, the whole nine yards. But pick your copy up right now at the John Gaffer and get a bunch of the awesome bonuses I've thrown out because I promise you, I put my heart and soul into this thing. I want it to help you change your life. Pick it up everywhere. What's up everybody? Thanks for joining us for another episode of Escaping the Drift. Hope you got a bunch out of it, or at least as much as I did out of it. Anyway, if you want to learn more about the show, you can always go over to escaping the drift.com you can join our mailing list. But do me a favor, if you wouldn't mind, throw up that five star review. Give us a share. Do something man. We're here for you. Hopefully you'll be here for us. But anyway, in the meantime, we will see you at the next episode.
- [53:38]
B
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