The David Greene Show – Episode 26: BRRRR Gone Bad

Introduction

In Episode 26 of The David Greene Show, titled "BRRRR Gone Bad," host David Greene delves into the challenging and often tumultuous journey of real estate investing. This episode features a candid conversation with Chelsea Kopaz, a novice real estate investor who shares her harrowing experience with a deal that didn’t go as planned. David and Chelsea explore the intricacies of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy, highlighting the potential pitfalls and lessons learned from gone-wrong deals.

Chelsea's Background and Introduction to Real Estate

Chelsea Kopaz introduces herself as a "very, very new real estate investor, definitely in my newbie stages" (00:46). Eager to build her investment portfolio, she sought opportunities to practice her analysis skills. To combat her tendency towards "analysis paralysis," Chelsea adopted a decisive approach: "the first one that comes around that feels right, numbers look good. Let's go for it" (01:18). Supported by a partner who encouraged her endeavors, Chelsea connected with a local wholesaler in Indianapolis through a mutual friend, providing her with a level of trust and credibility in her initial foray into real estate.

The Initial Deal: Purchase and Rehab

Chelsea's first major investment was a property purchased for $85,000 with an anticipated rehab cost of $34,000, totaling an all-in loan of $119,000 (03:53). The wholesaler promised an After Repair Value (ARV) of around $156,000, aligning perfectly with the "75% rule" often touted in real estate investing. Chelsea felt confident as the rehab progressed smoothly, with the wholesaler’s private money lender providing regular updates and sticking to the budget. Chelsea remarked, “he was kind of like taking me under his wing” (04:48), underscoring a sense of mentorship and support.

Scaling Up and Emerging Problems

Buoyed by the success of her first deal, Chelsea sought to scale her investments, believing that more deals would mitigate risks and enhance her portfolio. However, this ambition led to overextension. As Chelsea juggled multiple properties, communication from the wholesaler and his team began to falter. "Rent would get missed. Emails would get missed, things would be delayed, hard to get a hold of" (06:34) became recurring issues, signaling the beginning of her struggles.

Discovering Discrepancies and Issues

The turning point came when Chelsea decided to inspect the properties in person. She uncovered unsettling truths: contrary to being evicted for non-payment, a tenant had been shot and killed in one property—a fact she learned from neighbors, not her property manager (09:54). Additionally, physical inspections revealed poor construction quality, missing elements, and outright shortcuts in the rehab process. Chelsea realized that the "private money lender was sending out an inspector" (10:19) whose assessments were not reliable, leading to significant gaps between reported progress and reality.

Financial Struggles and Attempted Solutions

Facing multiple incomplete properties, Chelsea found herself financially strained. Without adequate reserves, she resorted to credit cards to fund necessary repairs, pushing her debt-to-income ratio dangerously high (16:07). The situation was exacerbated by the realization that refinancing wasn't feasible due to the high-interest rates and insufficient equity in the properties. Chelsea expressed her desperation: "they wouldn't do that because they know a little bit of work needs to go into it. And so that number just drops dramatically when you say, oh, it needs appliances" (21:29).

Advice and Insights from David Greene

David Greene provided Chelsea with strategic advice to navigate her predicament. He suggested negotiating with her private money lender for a forbearance period or offering equity in exchange for better loan terms. Greene also introduced the idea of bridge loans as a potential solution to secure more favorable financing (25:12). Beyond financial strategies, David emphasized the importance of emotional detachment in real estate investing. He encouraged Chelsea to view property decisions through the lens of energy management, advocating for the sale of underperforming properties to free up resources and emotional bandwidth for more promising investments.

A pivotal moment in their discussion was David’s analogy comparing real estate investing to learning a physical skill like snowboarding. He highlighted the inevitability of failure and the importance of perseverance: “Nobody should expect to crush it on a deal when they first do it... The first time you get a deal, it sucks no matter what you do” (35:19). This perspective aims to alleviate the guilt and self-doubt that often accompany failed investments, framing them instead as essential learning experiences.

Conclusion and Final Thoughts

Chelsea concluded the episode with a renewed sense of purpose, acknowledging the invaluable lessons learned from her ordeal. She expressed gratitude for the support and resources provided by the podcast and its community, stating, “It's part of the journey. It's gonna happen. Expect it” (42:35). David reinforced the notion that sharing both successes and failures is crucial for growth in the real estate industry. He encouraged listeners to view setbacks as stepping stones towards greater achievements, emphasizing the collective learning experience fostered through honest discussions.

As the episode wrapped up, David promoted his upcoming book, "Better Than Cash Flow," and provided avenues for listeners to connect and share their own real estate stories. Chelsea shared her Instagram handle, inviting the community to support her ongoing journey, while David reiterated the importance of sharing and subscribing to the podcast for future insights and guest stories.

Notable Quotes

• “The first one that comes around that feels right, numbers look good. Let's go for it.” – Chelsea Kopaz (01:18)

• “He was kind of like taking me under his wing.” – Chelsea Kopaz (04:48)

• “Rent would get missed. Emails would get missed, things would be delayed, hard to get a hold of.” – Chelsea Kopaz (06:34)

• “The tenant did not stop paying, according to the neighbor... the tenant had actually been shot inside the house and passed away.” – Chelsea Kopaz (09:54)

• “I just maxed out all the credit cards and debt that I can, and I don't have any way of borrowing money from anyone.” – Chelsea Kopaz (24:22)

• “You have to start by recognizing that they're not. Chelsea, you didn't suck.” – David Greene (35:23)

• “The first time you get a deal, it sucks no matter what you do.” – David Greene (38:10)

• “It's part of the journey. It's gonna happen. Expect it.” – Chelsea Kopaz (42:35)

Key Takeaways

1. Due Diligence is Crucial: Chelsea’s experience underscores the importance of thorough due diligence, especially when working with wholesalers or contractors who wear multiple hats.

2. Manage Scaling Carefully: Rapid scaling without adequate support systems can lead to operational breakdowns and increased vulnerability to issues.

3. Financial Prudence: Maintaining adequate reserves and avoiding over-leverage are essential to weather unforeseen challenges in property management.

4. Emotional Resilience: Emotional attachment to properties can cloud judgment. Viewing properties as investments rather than personal assets can aid in making objective decisions.

5. Learning from Failures: Every setback offers valuable lessons. Sharing these experiences contributes to collective knowledge and helps others navigate similar challenges.

6. Community Support: Engaging with a supportive community and seeking mentorship can provide guidance and mitigate feelings of isolation in the often solitary journey of real estate investing.

Final Thoughts

"BRRRR Gone Bad" is a compelling episode that offers a raw and honest look into the realities of real estate investing. Through Chelsea Kopaz’s story, listeners gain insight into the potential risks and setbacks that can occur, even for those new to the industry. David Greene’s empathetic and strategic guidance provides a roadmap for overcoming obstacles, emphasizing the importance of resilience, continuous learning, and community support. Whether you’re a seasoned investor or just starting, this episode serves as a valuable resource for understanding the complexities and emotional toll that real estate investing can entail.