258. REAL DEAL: Building Wealth Through Smart Property Trades

Summary

Real Estate Investing School Podcast
Episode 258: REAL DEAL: Building Wealth Through Smart Property Trades
Release Date: May 1, 2025

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Introduction

In Episode 258 of the Real Estate Investing School Podcast, host A welcomes one of their seasoned coaches, Chase Johnson, to discuss a recent real estate deal. The conversation centers around Chase's journey with a property in San Antonio, detailing how he identified the opportunity, secured funding, navigated unexpected challenges, and ultimately adapted his strategy to ensure profitability.

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Deal Overview

Chase begins by outlining the initial vision for the property:

Chase Johnson [00:57]: "Whenever I'm running numbers for, I guess, really any sort of exit strategy, I always assume the worst case scenario… What happened with this deal was we actually bought it, planning to just turn around and, you know, flip it after forcing the appreciation."

• Purchase Price: $120,000
• Rehab Budget: $30,000
• After Repair Value (ARV): $205,000
• Original Plan: Flip the property for a profit within a short timeframe.

Chase emphasizes the importance of building worst-case scenarios into his planning to safeguard against unforeseen delays or complications.

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Financing Strategy

A significant portion of the discussion delves into Chase's financing approach:

Chase Johnson [04:57]: "Yeah, I used hard money. I found a really good lender… my down payment on that was probably like seven grand."

• Financing Type: Hard money loan
• Down Payment: Approximately $7,000
• Interest Rate: 12%
• Loan Term: 12 months
• Points: 1.5% carried to the backend (no upfront points)
• Rehab Funding: $30,000 allocated through rehab draws, allowing for phased fund releases.

Chase explains his method of prioritizing high-margin rehab phases to maximize returns early in the project:

Chase Johnson [07:48]: "I've already gotten that back. So for my initial investment, I'm still, as of current, I'm still 100% cash on cash return off of that initial investment."

This strategy ensures that his initial capital is recovered swiftly, enhancing overall profitability even if the project timeline extends.

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Challenges Faced

Despite meticulous planning, Chase encountered several obstacles:

1. Contractor Delays:

   • His contractor, who was also a tenant in another property, caused significant delays by balancing rent collection with project work.
   • After eight months—far exceeding the initial one-month timeline—Chase decided to replace the contractor.

   Chase Johnson [08:09]: "But if I hadn't bought it, you know, as it made sense for a rental, then I would have been probably in over my head."

2. Permit Issues:

   • A stop work order was issued due to a data entry error by the city, incorrectly associating the permit with the wrong property address.

   Chase Johnson [10:14]: "They placed the permit on the wrong house. So they drove by, they put a stop work order."

These challenges necessitated a reevaluation of the original flip strategy, pushing Chase to consider a long-term hold instead.

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Adjusting Strategy

Faced with delays, Chase pivoted from flipping to holding the property as a rental:

Chase Johnson [11:15]: "It's kind of eaten up most of that. So yeah, I mean, if I go to actually flip it at this point, I mean, I don't know if it would make a lot of sense."

He outlines how his initial calculations still positioned the deal favorably:

• Original Investment: $153,000 (Purchase + Rehab)
• Adjusted Tenure: Extended to eight months, primarily covering interest payments.
• Refinancing Plan: Anticipates refinancing based on the ARV to pay off the hard money lender and transition to traditional financing, ensuring continued cash flow.

Chase Johnson [12:21]: "They're funding hard money is funding at 75% of the ARV. So if I refi into traditional, like let's say … it's still less than a 20%, you know, investment loan, down payment."

This strategic flexibility exemplifies Chase's commitment to preserving capital and maintaining profitability despite setbacks.

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Current Status and Future Plans

As the renovation nears completion, Chase remains optimistic:

Chase Johnson [09:46]: "We're probably not even a month into this guy and he's doing really, really well. So we're actually almost done with it."

His focus now shifts to:

• Finalizing Renovations: Expected completion within the next week.
• Rental Operations: Transitioning to a cash-flow-positive rental with anticipated monthly returns.
• Long-Term Growth: Leveraging the property's appreciated value and stable rental income for sustained wealth building.

Chase also highlights the importance of contingency planning:

Chase Johnson [16:47]: "Your risk contingency holding, capital expenditures, all that, you build it into your deal before you actually buy."

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Key Takeaways

1. Plan for the Worst: Always incorporate worst-case scenarios into your investment strategy to mitigate risks.
2. Flexible Financing: Utilize hard money loans with favorable terms to secure and renovate properties efficiently.
3. Adaptability: Be prepared to pivot your investment strategy in response to unforeseen challenges to preserve capital and maintain profitability.
4. Network and Relationships: Building strong connections with wholesalers and contractors can provide timely access to deals and resources.
5. Cash Flow Focus: Prioritize strategies that ensure positive cash flow, even if the original investment plan changes.

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Conclusion

Chase Johnson's experience serves as a testament to the resilience and strategic foresight required in real estate investing. By anticipating potential setbacks and maintaining flexibility in his approach, Chase successfully navigated delays and regulatory hurdles, ultimately steering the investment towards long-term profitability. His story underscores the importance of thorough planning, robust financing strategies, and the ability to adapt to changing circumstances—key elements for anyone looking to build wealth through smart property trades.

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Follow Chase Johnson

Stay updated on Chase's ongoing projects and insights by following him on Instagram:

@flipping_sanantonio

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Thank you for tuning into the Real Estate Investing School Podcast. Subscribe to stay informed on the latest strategies and success stories in real estate investing.

Transcript

[A]

Welcome to the Real Estate Investing School podcast, the Real Deal episode. Today we've got one of our coaches, Chase Johnson. How you doing, Chase?

[B]

Good. What's going on?

[A]

Good, man. Just excited to dive into one of the deals you've done and kind of let everybody learn from what you learned. So we'll hear about how you found it, how you funded it, and how you forced it to make it profitable. So anyway, yeah, let's just dive right in, man.

[B]

Yeah, man, this one's been a project. It's crazy. Lasted a little bit longer than we had initially planned, but, you know, we're making it work.

[A]

That's how it goes. That'll be good. You know, sometimes it's good to, you know, a lot of these stories, a lot of stuff works out pretty well, so it's kind of cool to hear ones that maybe drag out. You have to pivot and things don't go as planned to see, like, alternative solutions. So that should be good.

[B]

Yeah, yeah. The nice thing is that whenever, whenever I'm running numbers for, I guess, really any sort of exit strategy, I always assume the worst case scenario, which, I mean, usually ends up being just long term buy and hold, you know, because there's, you know, almost little, little to no risk in that. So what happened with this deal was we actually bought it, planning to just turn around and, you know, flip it after forcing the appreciation. And yeah, my contractor, to say the least, he just took like, way too long on it, you know, so it. We ended up just, you know, shifting strategies and we're like, hey, let's just keep it as a rental. So. But if I hadn't bought it, you know, as if it made sense for a rental, then I would have been probably in over my head. So.

[A]

Yeah, so tell us real quickly. So you base it off, worst case scenario. Um, and by worst case scenario, you mean, like, if I can't sell it and I'm holding it, I, I at least won't be like, I, I at least won't lose it. I guess that's the main thing. If everybody listens to me, I'm always like, hey, get as many assets as you can. But number two rule is like, don't lose your assets. So basically, you make sure that you have an exit strategy where you won't lose out no matter what.

[B]

Yeah, definitely. Yeah, for sure. And then it's, it's all done in my, my evaluation process. Right. So I assume worst case scenario throughout the whole thing. So risk and contingency and, you know, holding it longer Than expected, like all that. I actually build that into my deal evaluation so that just in case it does happen, I'm. I'm ready for it, you know.

[A]

Yeah, that's so important.

[B]

Yeah. So like, if I'm going to flip it, for example, most flips I can get done in probably three months. You know, if it's a, if it's a longer, like more extensive flip, it's going to take a little bit longer. But this one, the contractor at the time, he had told me he could get it done in a month. Right. So I'm thinking, okay, cool. Worst case scenario three. Right. Which we're. We're eight months into it.

[A]

Oh my gosh.

[B]

Yeah.

[A]

But let's, let's back up then. So how did you find this deal? Where's it at? When. What year was this? I mean, is this currently happening? Like what, where did you find the deal?

[B]

Yeah, so it's here in San Antonio. What happened was I had a friend.

[A]

The.

[B]

He had. He's been doing real estate for a long time here in San Antonio. Kind of a big player, does a lot of business. We, we had kind of kept in contact and every now and then, you know, we talk. We're like, hey, we're gonna do a deal eventually. But he had had a, he had gotten a deal on our contract and put it up on Facebook in one of like the, the local investor groups here. And I was like, hey, send me the details on this. So he sent it to me and I was like, yeah, I want to go look at it. So I went and I looked at it and asked me if he could cut me a deal because we'd been trying to do a deal together for a long time. So he's like, yeah, I'll cut you down to 1,120. So I was like.

[A]

He acted as the wholesaler on it. He found it and then wholesaled it to you. You end up getting it under contract and your plan is to flip it. That's the ideal scenario when you're going into this.

[B]

Yeah, we just wanted to flip it.

[A]

Cool.

[B]

So I, he had it under contract for like 115 or something. So we barely made anything on it. But I picked it up for 120. I budgeted 30 for repairs and then the ARV on it was around 205. So all in, I'm thinking, you know, probably 153, you know, and then sell it at 205. Let's say worst case scenario, 195. So that was the original plan. So.

[A]

So and then. So that's how you found it was through a friend wholesaler that you've been working with. So just like be active, keep your network going, people. And then you're able to jump on it. And then how did you fund it? Did you use hard money? Is that typically how you fund these projects?

[B]

Yeah, yeah, I used hard money. I found a really good lender. All in. I was, I think my down payment on that was probably like seven grand.

[A]

So what were the terms, if you don't mind sharing, what were your terms on your hard money? How many points did you pay up front? What was your interest rate and how long were they willing to hold the note?

[B]

Yeah, so points on the back end. All points on the back end.

[A]

So you didn't have to pay any points up front?

[B]

No.

[A]

And for those listening, a point is just 1% of the purchase price. So if you got it for 120,000, you know, you'd be looking at, what is that, 1200 bucks or something would be a point. So they, they're going to charge what, two or three points, but they'll, they'll take it off the profit at the back and not charge you up front?

[B]

Yeah, they're doing one and a half on the back end.

[A]

Okay.

[B]

Yeah. But then on the, on the front end, I think I just paid like, you know, recording fees, title fees, whatever, you know, whatever the fees are, document printing, whatever it is, you know, just on the upfront.

[A]

So cool.

[B]

All in, you know. Yeah, I mean I was, I, yeah, I think they had me pay maybe like the first couple months of, you know, of, of of interest only payments. Let's see. But yeah, I mean it was, it was around seven grand to start.

[A]

Cool. And then, and was this. Did. It was a six month term, 12 month term. What was the idea?

[B]

It was 12. Yeah, 12 with a 12 interest.

[A]

Cool. So you lock it down using hard money. About 7,000 up front. You got two points coming out at the bank back end or one and a half at the back end. 12% interest, 12 month term. So now you have this money, right, and they, they give you money for rehab or just the purchase?

[B]

Yeah, so they did on rehab. It was 30 for the rehab draw, hold back, held in escrow the way that I do my, my draw reimbursement. So I split my rehab into rounds. Right. And I usually try to plan it to where my first couple of rounds have the highest margin when I submit for rehab. So for example, if I am going to do like, let's say, you know, let's say foundation and clean out. And that's going to cost me, let's say seven grand, Right. When I submit for my draw reimbursement, I'm going to submit for more than that. Right. So let's say 11, right. So I'm getting back 4,000 more than what I didn't initially put in to the first round. So doing that round over, round. The way that I usually try to do it is by round, you know, three. All of my initial seven grand that I use to get down or to. To. As a down payment, I've gotten all that back. So essentially, the way that I do it, I'm 100% cash on cash before I'm even done with the deal.

[A]

Oh, that's cool. I like that. And so, because you're getting a little extra on the draw each time, so then you get the draw. So they're funding the purchase, they're funding the rehab. You're going through it, Everything's looking good. And then what happened? What happens next? Because one month is a lot shorter than eight months.

[B]

So where I actually went wrong was my contractor is also one of my tenants on another house. So he would pit rent versus the work against each other. And he would say, oh, well, if you want rent, then, you know, I gotta have money to do, you know, the. The rehab. So it's just back and forth. But I mean, all in all, like, yeah, it just took longer. And he just kept saying, you know, tomorrow, tomorrow, tomorrow. It just eventually got to the point where I was like, look, man, I gotta find somebody else, you know, so.

[A]

I'm like, I need to finish this or I'm gonna evict you and fire you. Oh, my gosh.

[B]

Yeah. Yeah. The dilemma that I was running into was that the. Legally, I had to keep the two separate.

[A]

Right, Right.

[B]

So they. Yeah, their roles couldn't commingle. So.

[A]

Yeah. But, yeah, that's interesting. I've actually had issues with that too, where I, like, hired tenants in kind of a trade thing to do work, and it always just gets messy. I don't know. Like, I had someone, like, it was supposed to, like, paint my house while I was out of town, and he used the wrong color. And it was like, bro, like, it was the outside of the house too. So, like, the grays, like, don't match on the same wall. Like, swat and swath, neck to swath. It's just like. And. And there's not much I could do because it weren't. It wasn't a real contract or Wasn't a real, you know, anyway, doing trade with tenants is probably a line you don't want to cross. You know, I'm sure it's work sometimes and people feel like it's dope and it probably is when it works out, but I've had issues with that too. So. So you're, you fire him, you get a new contractor to finish it up. Is that where you're at now or did that happen a few months ago?

[B]

Yep, that's where we're at now. So we're probably not even a month into this guy and he's, he's, he's doing really, really well. So we're actually almost done with it. It should be done here in about a week, I think. So not to say that the problems stopped. Right? I mean, they continued. You know, I got, I got a stop work order from the city because the city placed the permit on the wrong house.

[A]

Oh my gosh. They just put the wrong number on the address, right?

[B]

Yeah. I mean, my handwriting clearly shows the right address. But you know, when they did the data entry, it shows the wrong house. So they task force is what they call them. So they drove by, they put a stop work order. But yeah, so I'm dealing with that. I gotta meet with him Thursday. So, yeah, that's where we're at.

[A]

We should be done something. So when, let's say it finishes in the next, you know, week or month or whatever, where are you going to be sitting at there? Does it to force this to actually be a good deal still? Even though it took, you know, eight times longer than expected, which is probably double your, your worst case scenario still. What, what are the numbers going to look like then? Are you still thinking flip? Are you thinking long hold or have you been. What's kind of been the strategy there?

[B]

Yeah, I'm definitely going to keep it because the idea was to finish, to finish all in at 153, which was the 120 for purchase. And then the difference from 120 up to 153 was rehab. Right. But in my interest payments, interest only payments, the last eight months.

[A]

Right.

[B]

It's kind of eaten up most of that. So. Yeah, I mean, if I, if I go to actually flip it at this point, I mean, I don't know if it would make a lot of sense. But regardless, I, I mean, I'd probably still make money on the flip, of course. But the way that I look at it is if I can hold it, make money on the, you know, the rents and then the the appreciation and then obviously like tax savings and all that. Yeah. Then I mean I might have to wait a little bit longer for a return. But the return long term is more of a payout than me just, just flipping it.

[A]

When anybody knows me, they know that's what I love. I love infinite returns, even if it's slow and long. But if, if it's infinite, I love that. So, so no, that's not a bad thing. So what's the plan to be able to keep it then? Kind of like a bird of the thing. Basically you're just going to go refinance it based on the after repair value arv and you should be able to get enough money to pay off the hard money lender and keep the property at least break even or cash flowing.

[B]

Yeah. So the nice thing is that they're funding hard money is funding at 75% of the ARV. So if I refi into traditional, like let's say you know, 80%, my all in cash basis, like I'm still under 75%. Right. So even once I go to, to do a refi, even if I don't have enough for like just a full on traditional cash out refi, I pencil the numbers well enough so that even if I have to come to the table and at refi, it's still, it's still less than a 20%, you know, investment loan, down, down payment. So I mean I'm thinking all in, if I have to come to the table or refi is going to be like, you know, maybe a few thousand bucks. But the way that my cash on cash return works with the, with rents, you know, it's still an astronomically high cash on cash return because remember, because.

[A]

You'Re in it like 10,000 or something maybe. And it's like if you're getting even, you know, 100 or 200 bucks cash flow, like your cash and cash returns. Great, I'll, I'll go buy some for 10,000 right now for a $200 cash flow, you know.

[B]

Yeah, because remember all of my seven, I've already gotten that back. Right. So for my initial investment, I'm still, as of current, I'm still 100% cash on cash return off of that initial investment. But now what I need to do is I need to get my money back from my, my interest only payments payments. Yeah, most of it's going to be, you know, from the appreciated value. Even if there's not enough, I'm going to get it back from what I'm getting in rents Which I should get in the first year. So It's a. Essentially 100% cash on cash return in the first year.

[A]

It's cool because it's one of those things like long term, like say, oh, it's awesome. You got this house really free. It ate it. More bandwidth and time and effort than you probably would have normally designed. But it's like the home's there and you didn't lose it. And that's what's cool is okay, plan A was to flip it. Things didn't go as planned. So plan B is you can, you can just long hold in and do a burr, you know.

[B]

Yeah.

[A]

Which is cool. So I, I love that you have that strategy and so that's kind of how you forced it even as things changed. Have you got a lender lined up for the long term debt?

[B]

Yep.

[A]

That's awesome. Do you know what kind of terms you're going to be getting on that?

[B]

I don't. Interest is going to be a little higher than I like, but I'm not even that concerned about it because I can always refi.

[A]

Yeah.

[B]

So yeah, I mean I'll probably cash flow maybe 400 bucks, you know, so. But still, I mean, the way that I look at it is things are going to correct. I can always refinance to a lower interest rate. So yeah, I mean it's definitely in a highly, highly rentable area. Yeah, I mean it's, it's gonna be a newer thing for me because I have to deal with, you know, some like, lower clients or sorry, lower tenants than I'm actually used to. But all in all, I mean, like I said, I planned for the absolute worst case scenario when I, when I got into it. And not even the worst case scenario is actually happening right now. So it could get worse than it is right now.

[A]

Sure.

[B]

And it would, it would probably still pencil.

[A]

So I love that. And that's what's so cool when you do real estate. Right. Like it's like it's either win or win bigger or win really big. But there really shouldn't be much losing, you know, if you calculate it right. Well, that's dope, dude. Thanks for sharing the details of that ongoing deal. That's exciting. You know, sometimes these deals are like 10 years ago, it's like, oh, cool. But hearing something that's happening right now, today that really anybody could, could go. Do you know what I mean? And for you, you're like, oh, there's a disappointment. There's probably listeners, even me, I'm like, well, If I could get a free house for one for 10,000 bucks, like, that would be great. I'd love nothing more than building my portfolio. And so it's like, even. Even, you know, the. Not the plan B is still an awesome thing people can go out and start doing. So Burr's not dead even in today's market, huh? Love it, man.

[B]

Yeah. Biggest thing I could say is. I mean, I know it's cliche, but. Yeah, you make your money when you buy, you know, so we like to think it's when we do the refinance or the sell or whatever and the actual cash hits our bank account. Like, no, you made your money way before then, you know, so you got.

[A]

You got a good deal on the purchase price.

[B]

Yep. And your risk contingency holding, capital expenditures, all that, you. You build it into your deal before you actually buy. And again, if that's all built into your evaluation, you know, and it still pencils and you still get it under contract, then you're good to go.

[A]

I love it, man. Well, sweet. Any other details of this deal you want to share?

[B]

No, that's it. Whenever it's done, I'll send out pictures.

[A]

There we go. We'll get a little update from you.

[B]

Yep.

[A]

Well, I appreciate it, man. If people do want to follow you and see how the deal ends up going. What's your Instagram to follow?

[B]

It's at a free. Let's see. Flipping San Antonio. Flipping Underscore San Antonio.

[A]

Flipping underscore San Antonio. That's on Instagram. So people can kind of follow the process with you and fill it all, go down live. So.

[B]

Yep.

[A]

Awesome. Thanks for being on the show, Chase. Appreciate having you here.

[B]

Okay, thanks.

[A]

Take care.