Loading summary
Transcript129 lines
- [00:00]
A
What's going on, everyone? Welcome to the David Green show, Real talk real estate. I am joined today by Dawson, a home flipper in California who's exploded his business into different areas. And we are going to be analyzing a real life deal that he got. He's gonna be sharing how he got it and asking for my advice on what I think he should do. So if you've ever wanted to be a fly on the wall in my world or the world of a successful wholesaler real estate investor, you've come to the right place. Dawson, thanks for joining me today.
- [00:30]
B
Yeah, thanks for having me.
- [00:30]
A
Yeah. So you and I met at a real estate meetup that the David Green team put together in. Was it Walnut Creek?
- [00:35]
B
Yeah.
- [00:35]
A
Fun time. And you're here to share a deal with us. So let's get into this thing. How did you find this deal?
- [00:41]
B
So I do a lot of direct to seller marketing and the seller received one of our mailers, went on our website and gave us a ring. It was actually the father in law of the seller who originally called me, trying to get some help for his mother in law.
- [00:56]
A
All right, so you said you have a website and these people come to you. Right. Tell us how that thing is set up. Did you hire a company to build this website? Did you do it yourself?
- [01:04]
B
We hired somebody to build it for us and we have an SEO company that does SEO for us monthly.
- [01:10]
A
Okay, so this is one of those big deals. So you get a phone call. Tell me how the phone call goes when you first connect with the sellers.
- [01:18]
B
Yeah, so when somebody calls, I just go off the four pillars of motivation, timeline, reason for selling, condition and price. And I filter a lot of leads. We probably get five leads a day. And if they're not somebody who hits at least one of those pillars, I'm not talking to them. So when this particular seller called, they mentioned that their mother in law was elderly, she wanted to move out. The house hadn't been renovated since the 60s and it had massive foundational damage. The garage was basically sinking. So I knew that they were a pretty motivated lead. And it's interesting because I actually haven't ever, ever been to this property. The seller wanted to. They were kind of doing the due diligence process. They got our mailer, they said, yeah, I want to sell in about four or five months. And it was a good enough deal that I said, hey, well what if we could buy it within seven days? Give your mother in law another four or five months to move out and then take care of the Renovations, and they were all pumped for that, so that's what we ended up doing.
- [02:16]
A
Okay. Now, when people hear the word foundation, they immediately think, run away. Give us a little bit of education on what the foundation is. Are these irreparable damages? What should people expect to pay when there is foundation? Just educate us a little bit on why that didn't scare you from this deal.
- [02:31]
B
Yeah, this is a pretty flat lot. I can show you the pictures. It's. It's not on a hill at all. Most of it was just water damage. When he sent the seller sent me pictures, and there was a gutter that you could tell was just leaking water out. And right where it was leaking water out, that's where you started to see the roof line start caving in and the foundational cracks. So I knew that we would probably have to jack up the walls, jack up the roof, and then lay a new foundation underneath, which is probably 20, $30,000 for that. In a lot of cases, if the house isn't on a hill and it's just sagging, usually just due to water damage. So you can put in like a French drain around the house, and then you can also do. You can have a foundational specialist come in and jack up the peers. It's really kind of a situational base. Situation by situation, it can be as low as five grand, as high as 150 grand for a house.
- [03:37]
A
Now, how do they determine if it's going to be 5 grand or 150 grand, and what are they doing?
- [03:41]
B
Again, a situation by situation basis. Like, for a $5,000 fix on a foundation, it would be something where maybe there's some horizontal cracks. That's something to look for when you're flipping a house. If there's vertical cracks, it's not a huge issue, really. It's when there's horizontal cracks, that's when there's bad news on a foundation.
- [04:03]
A
Okay. So vertical cracks would be like something going up the walls. You're talking about something in the floor.
- [04:08]
B
Going horizontal or in the foundation itself. So if you. If you. There's two types of foundation, right? There's a slab foundation, and then there's a raised foundation. The way you can tell the difference is if you just walk around the house, you're going to see little rectangular vents two or three feet above the ground. If you see those, that means it's a raised foundation and there's space under the house.
- [04:31]
A
Usually there's a stair that will go up to the front door as well, Right?
- [04:34]
B
Exactly. First lab, you're just going to see the siding or the stucco is going to go almost right to the ground. It might be up an inch or two above the ground for. So no water gets on the siding and slab foundations. Usually nothing happens. If something does happen, it's really easy. We had a situation where we just dug out the slab foundation and poured a new one. And I think it was three grand for a 10x15 space. Of course, we had our own guys do it, so it was a little bit cheaper. But if it's a slab then, and it has some drainage issues, then it's probably not a huge deal. You'll see cracks in the walls, especially around the windows.
- [05:12]
A
All right, so this property that you're looking at, is this a slab, Is this raised foundation? And did you get specifics on why this garage was sinking into the ground like you said?
- [05:19]
B
Yeah, so the. It was a raised foundation and it was really. The sellers had converted the garage into a living space. And they did it back in, I think, the 60s, before you ever had to get permits. So they never had impermits, they never had inspections, they never got an engineer to take a look at it. And what they forgot to do was put up gutters in the right places. So there was a downspout for a gutter and it was just water. Every time it rained for the last 40, 50 years, the water was going under that garage and slowly began. One part of the garage was just sinking. And you can see in the pictures, there's about a 3 inch gap where you can see the foundation is separating from the house.
- [06:04]
A
All right, so this was an issue that water had gotten underneath the house, had worn out the foundation itself. Water damages real estate all the time. I don't think people realize it. It's almost always bad when water touches a house, which doesn't happen in California very often, but in case. In this case, it did. And so what was your estimate to get this stuff fixed?
- [06:23]
B
So we spent. We're almost done. We spent about. It was a big foundational job. We spent about 70 grand on the foundation. And then the rest of the house, just under 100. About. About 85, 90,000 to renovate the rest of the house. It's a. It's a pretty big place. About 2,000 square feet.
- [06:42]
A
So 85,000 for the rest of it. How much for the foundation?
- [06:45]
B
About 70 grand. We had to do the foundation from the garage all the way to the back of the house to keep compliance with code and perm.
- [06:52]
A
And this was a. This was a Pyramid beam. Okay. So they're gonna have to basically jack the house up, fix the. The piers that the beams sit on. Sometimes they have to replace the beam itself, lower it back down, and that's going to cost 70,000, mostly from the labor involved, because it's expensive, because not everybody knows how to do this stuff.
- [07:08]
B
Yeah, we actually had the poor. New beams. Yeah, new beams as well. So that's why it was so expensive, because they jacked them up, poured new ones, and then put them back down.
- [07:16]
A
All right. And the sellers of this property knew they had a problem with the foundation, but maybe they didn't know how expensive it was going to be to fix it. Right?
- [07:22]
B
Yeah, they knew it'd be exp. But it was just one of those things where they didn't know the first thing about foundations. And it was really daunting, really intimidating. And so we were able to create a win, win situation where we bought it. I mean, we still gave them a million dollars for the house. They got a lot of money for it. But, yeah, we also got a pretty dang good deal on it.
- [07:39]
A
So how did you come up with that million dollar number? Did you ask them what they owe on the house? Did they propose a million? How did you guys settle there?
- [07:46]
B
Yeah, so usually how my. Usually how my calls go is I'll just say, tell me a little bit about the house. Why do you want to sell? So I'll get first their reason for selling, and then that's a pretty natural transition into how the. How's the condition? Because if they're motivated, the condition probably isn't great. I'll then ask them what their. What their timeline is, when they're actually looking to sell. And kind of a money line that I use is, I'll say, great, I'll start running numbers on your property. You guys have an idea of what you're hoping to get out of it. And it kind of. Instead of saying, how much do you want to sell a house for? Or something like that, it kind of gives the precedence. Hey, I'll run my numbers. I'll do my due diligence. Do you know how much you want? And it really puts people at ease, lets them kind of open their shell. Give me a number. And I asked them that, and he said, you know, we'd be really happy if we could get a million dollars for the house. I said, great, I'll run my numbers on it. I was actually in the car headed to another appointment. I went to that appointment. I got that deal, and then I drove an hour back to my house, started running numbers on it, realized, okay, this is a great deal. I got to call this guy right now and lock this thing in contract.
- [08:49]
A
Yeah, that's awesome. And then how did you come up with the arv? Do you have agents that work with you? Do you do this yourself?
- [08:54]
B
Yeah, I just do it myself. So I go on Zillow. Just look at what comparable homes are selling for. Punch it into my spreadsheet and. And yeah, see what, see what our target profit is versus our actual.
- [09:05]
A
And then once you put it under contract for the million. Is that when you came up with the numbers for the foundation work? 70 grand plus 85 for the rest of the reno?
- [09:12]
B
No, I actually, when I got it in contract, I didn't even know how much it was going to be to do. I didn't even know what the house looked like. I just knew. So we, we purchased it for a million and it's worth fully renovated, about 2.2, 2.3. I knew that no matter how much we spent on this house, we would make a profit. So it was worth locking it up at that point. I don't do that with all the properties, but this one specifically.
- [09:36]
A
How many square feet is this house?
- [09:38]
B
1975.
- [09:39]
A
That's not very big. So this is going to be a really good neighborhood. Does it have like a really nice view or anything?
- [09:43]
B
No, no, it's just a high priced area. People love to move there. There's a lot of tech there. So we're able to get a higher resale value on it.
- [09:51]
A
Let's share some pictures of this sucker. Let's go through and see like if you have some before pictures because I don't think you've started the work on it, have you?
- [09:58]
B
Yeah, we're pretty close to being done with it.
- [10:00]
A
So we'll start with before pictures and see what you were buying.
- [10:03]
B
So this was the master bedroom kind of towards the back of the house. It wasn't quite the garage, but it did have quite a bit of. But it did have quite a bit of foundational issues. You can see here, there's foundation, there's cracks all over the house from the foundation, but relatively good shape. This was the kitchen. It was pretty outdated. So we were redoing the kitchen. We were opening up this little door right here. So there's no wall because that's the front door. This is the half bathroom that's in the garage. You can see this. The cinder block, the garage. The whole house was built with these cinder blocks. So we're putting up some. We're going to put up some drywall so it looks like a house and.
- [10:44]
A
Not a garage or a prison cell.
- [10:47]
B
Yeah. So this is an example. In the master bedroom you can see the foundation was. Had completely sunk. It was about 3 inches down where the ceiling was.
- [10:57]
A
All right, you just click through these. We'll get a feel for what the property looks like. Typical. When you get in an off market opportunity at a good deal, it usually is in disrepair just like this. Doesn't look bad on the outside though.
- [11:08]
B
No, you can see this is the garage that was converted. You can see the cracks out front.
- [11:13]
A
No, I was expecting it to look worse on the outside. That's not bad at all.
- [11:16]
B
Not terrible.
- [11:18]
A
That.
- [11:19]
B
Yeah, that's the side of the garage.
- [11:20]
A
Yeah. That does look like it's sinking right into the ground.
- [11:23]
B
Yep. So we completely had to jack all of this up and then put a new foundation in right here. Yeah. The house was in relatively good condition. It was just really outdated and it had that one foundational issue.
- [11:33]
A
Big backyard.
- [11:34]
B
So the thing about this house is that original buyers. So the. The mother in law's parents purchased this property. They actually purchased two lots because they wanted a bigger lot. So they purchased two lots and merged them together. Lot in the neighborhood.
- [11:49]
A
And then you have. What's that building that you just showed? Is that like a garage in the back of it somewhere?
- [11:54]
B
Yeah, just a little garage.
- [11:56]
A
Does it have plumbing run to it?
- [11:57]
B
No, but it does have electrical.
- [11:59]
A
All right, now let's see what it looks like after some of the work's been done.
- [12:02]
B
I actually don't have any of those pictures.
- [12:04]
A
Okay, we'll keep it mysterious then.
- [12:06]
B
Yeah.
- [12:07]
A
So you got this deal. You locked up at a million. You put about 150,000 into it or so.
- [12:12]
B
About 150.
- [12:13]
A
Okay. And now you think it's worth over 2. 2 million? 2.2 or so.
- [12:17]
B
Yeah. And as is comp not renovated like ours is going to be just sold at 2.15 and renovated comps about three months ago were selling 2, 2 2, 3.
- [12:28]
A
Okay. So you got a close to $1 million of equity here. If you sell, are you going to have short term capital gains taxes?
- [12:35]
B
No, we classify as ordinary income, so probably a little bit worse than.
- [12:39]
A
So will you be able to shelter any of that ordinary income with any cost segregation or accelerated depreciation?
- [12:45]
B
Not a ton, because we only. We're only going to own it for eight, nine months.
- [12:50]
A
Well, no, I mean from other properties. Sorry. As a real estate professional.
- [12:53]
B
Oh, like other Rental life long term holds? No, we got, we recently got rid of all of our long term holds just because of the tenant laws that are. We do a lot of business in Oregon, California, Nevada, Utah and historically tenant laws are getting worse in Oregon and California. So we sold all of our rentals.
- [13:13]
A
Gotcha. All right, so there's going to be a pretty big tax hit if you flip it and you're trying to figure out if you might want to hold it. Is that why you're trying to avoid the taxes or are you just thinking it's going to appreciate, you might want to get some of that too?
- [13:24]
B
Both. Yeah, definitely. The tax and then appreciation. Because this is a pretty hot area. They're not making new land here anymore, so there's nowhere to put new houses. So it's, it's going to be the same houses being sold day in and day out.
- [13:38]
A
Okay, so let's talk. What questions do you have for me, Dawson?
- [13:41]
B
Yeah, my main question is so if we sell this, this is my spreadsheet. If we sell it at 2:3, we purchase it at 1:1, our profit's going to be about 940. But if I get taxes, ordinary income that's almost going to get cut in half. So I'm curious to know, I know that if I do a brrrr with this, if I refinance it and start renting it out, I won't be able to pull out the full 2.3 million of equity that's actually in the home. I'm not sure how much I'd be able to pull out. So that, that's one of my concerns with the brrr. But I guess my, my interest in doing a brrrr is even though I'd pull out less money from the refinance, would that actually be more than what I would be paying in ordinary income tax? And what would it be more advantageous tax wise now and since I can do, what is it, 29 years of depreciation, would that be more advantageous in the future as well?
- [14:38]
A
It seems to me the only reason you asked that question is because you're trying to figure out how to have more capital to deploy in a future deals that where your thoughts are?
- [14:46]
B
Yeah, absolutely.
- [14:47]
A
So if I can understand you correctly, if you bur it, would you be able to get more money out than you would have if you sold it and paid taxes? Right?
- [14:57]
B
Yeah, exactly.
- [14:59]
A
Are you open to me challenging you on that perspective or that framework being how you make this decision?
- [15:05]
B
Yeah.
- [15:05]
A
Because I'm assuming your business doesn't need that. Does it need that much capital? Like, are you not using any hard money loans when you're buying properties?
- [15:13]
B
We are, but I'm pretty young. I'm only. I'm 26. I turned 27 and in a month. So I don't have crazy amounts of cash. So if I could take, at this point in my life, I'd love to take as much cash as I can to be able to build up to a point that it makes sense to put that money into rentals. Because right now it's the money that I make and that I turn back and put into houses is the. That's. That's where my income comes from.
- [15:42]
A
But are you having to turn down deals because you don't have enough money to put into these the next deal?
- [15:49]
B
No.
- [15:50]
A
And I would argue this is probably an easier time in history than ever to be able to raise capital to buy real estate. Doesn't mean you want to have to do that because that capital comes with a cost, obviously, but. All right, let's take a step back. Let me break down the 10 ways that we make money in real estate. Then we'll talk about for you specifically if getting the most capital out of this deal is the best move or if maybe it makes more sense not to. So I haven't talked about this a lot, but you've got four equity means, four cash flow means, and then you've got taxes and loan pay down. Is there a loan on this property right now or did you pay cash for it?
- [16:22]
B
Yeah, there's a hard money loan on it.
- [16:23]
A
So the first of the equity ways is buying equity. You've done that. You bought a buttload of equity when you bought this thing. More than we can even calculate here. Then there's forcing equity, which you're also doing as well. You spend about 150 grand, probably going to sell for 250 to $350,000 more because of the work you did. Some of that work you had to do, like you had to do the foundation. So I would include that $70,000 forcing equity. I would just take that out of what the equity that you bought was. But you've done those two things already, and that's equaled around a million and some change, 940. But then taxes, you have no way to shelter, so that's going to get cut in half. It's going to hurt you, which is what I'm trying to avoid here. That's one of the main things. Now you've got market appreciation, cash flow which is a form of cash flow that you develop when you buy an area where rents rise faster than the national average, which in this area they absolutely will. You and I both know this area. That's the case. And then you've got natural cash flow. Natural cash flow is what you get when you just buy a property and it cash flows for you on its own. Then you've got forced cash flow, which is what you get if you change the use of a property like a traditional rental to a short term rental. Or if you add units to a property, which these people already did when they added the garage. If they had made a separate unit, that could have been forcing cash flow. As it is, they forced equity when they did that because they added square footage to a small house to make it worth more on the equity ones that we skipped there. You have natural equity. That's just what you get when you own real estate that appreciates over time because the government inflates the currency. And then you have market appreciation equity, which is what you get when an area appreciates faster than the national average. Similar to market appreciation cash flow, which this area absolutely does. Okay. And then you've got loan pay down and taxes. If you flip it, you basically capitalize on the buying equity and the forcing equity you've already done. And then you lose half of that or so to taxes. So you're getting 2 out of the 10 ways of building wealth if you sell this thing. If you keep it, you bought equity, you forced equity. You're getting market appreciation equity because it's going to appreciate at a rate much faster than the national average with. That's why it's worth so much now. It's already done that. You're going to get natural equity because the government is lowering rates, which means home prices are about to go up even more and even faster. So you're going to ride this rising tide that's going to be way more than if somebody bought a property in Indiana that has the same dilemma. From an equity standpoint, this is a hard. You should keep this thing. You don't need to get rid of it right now. You also have so much freaking meat on the bone with this because you got it at such an incredibly good deal, you'll be able to find a way to make this cash flow, most likely, whereas other people wouldn't. If somebody paid 1.7 for this and it's worth 2.1, that's still a good deal. They probably wouldn't be able to cash flow it. You might be able to. So let's talk about your cash flow options. Natural cash flow. I don't think it's probably going to naturally cash flow. Have you looked into like what the rents would be just in its current condition?
- [19:16]
B
Yeah, it's. It's anywhere from about 36 to 42.
- [19:20]
A
Yeah. So you paid a million. You're nowhere close to the 1% rule if you're renting it out for four grand a month. Right. That's one of the downsides. So you've got market appreciation, cash flow that will be good for the future because rents are going to go up in this area more. I didn't mention buying cash flow as one of the 10. That's another one that doesn't really have a ton to do with real estate. That's more if you're investing in REITs or stocks or something like that. But you do have a forced cash flow option here. And that's going to be turning that garage into a separate unit as well as basically putting some more money into rehabbing that shed or whatever that structure was in the backyard. That's why I asked if it had plumbing, has electrical. It's pretty close to the main house. You'll be able to run plumbing to that thing without a ton of money. You may even be able to make a little bit bigger. But even if you don't, you can easily turn that into a studio. Studio is probably going to rent for what do you think, 2,500 bucks?
- [20:12]
B
Yeah.
- [20:12]
A
Hard to see it being much less than that in that area. It's very difficult to get anything for under $2,000. This is a really good neighborhood. So if you're able to convert that garage into its own studio and rent that out for 1500 and you're able to get. Even if it's only 2000amonth for that studio, you're at 3500 now. If the main house rents for 3000, you're at 6500. And you refinance that note into a 30 year fixed rate out of the hard money you're. You can buy it below 6% right now. You'd probably be in the high fives. You actually can cash flow now. The cash flow itself will be so insignificant compared to the equity here. I'm not selling you on. You should do it because of the cash flow. Let me get that part straight. However, it won't be losing money. You will have all the ways that it's going to gain money through equity. Building. Building this property is going to at some point be worth $5 million, $7 million with the way that we're debasing our currency. Okay. If you sell it, your question has to be, I'm losing half of the equity I already have, and I'm losing all of the equity I could build by keeping it, as well as all the cash flow that I could get by keeping it. The only way that makes sense is if you can take that $500,000 you're left with and you can make money with that capital at a faster rate than what could have happened in the property itself. Okay. Which you probably can based on how you're telling me your business model works. I just don't know that you need that $500,000 to do it. If you keep using hard money loans and you keep making money flipping houses and wholesaling, you can build up this capital. So maybe you only have to use the hard money loans for another year, two, three years and still have this thing over here with a massive amount of equity starting off and equity growing. And now you're paying off $1 million loan or whatever the case would be. You're, you're. You could probably accelerate depreciation on that thing to save you taxes that you're making from your flipping business. If you qualify as a real estate professional, you'll be able to take the income from your flipping business and shelter it with some of the depreciation from this asset. That's a $2 million asset. That's a good chunk of money. So it's not only going to save you taxes on itself, it's going to save you taxes on some of the other stuff you're doing. In my mind, I'd only tell you to sell this thing with the crazy taxes you have to pay. If there was no other way to get cash. If you were like, dude, I'm cash poor. I got deals coming to me all the time that I can't take down because I have no money. It would be painful, but I'd be like, you probably got a butcher, the golden goose. But I want you to keep that golden goose and get those eggs, man. I want you to delay gratification with this if you can, because it's in such a good area, you'll be able to make it cash flow. You could, you have the money right now. You could even take. Another option I was thinking of is you could take a HELOC on it and use that to fund your flips at a cheaper rate than what you're probably paying for hard money. You won't be able to get all the equity out, but you'll be able to get some of it. And you blend the cost of your financing with that HELOC and with the hard money rates that you're paying, you're going to make less money per flip, but you're going to build up a nest egg that you can eventually. Because I'm guessing that's your. Your goal here is you don't want to have to pay hard money rates when you're flipping houses. It's way better if you could pay cash. Right.
- [23:32]
B
Eventually. I mean, the nice part about hard money is you take 100 grand, you buy one house, or you take that 100 grand, you can buy four houses.
- [23:40]
A
I use hard money for most of the houses that I'm flipping because I really like that I can borrow money for the rehab and the house. It's really easy. With some of the bridge products we have, I put. I got one right now. I bought. I paid 230 or so. I put about. I put more than I thought I was going to put into it. I'm at about like 80 or 90, and it's ARV is going to be between 400 and 425. So I'm looking at between 80 or $100,000 for this property. I put $30,000 down because I borrowed 90 of the cost to buy, and then I borrowed 90% of the rehab. So, like, it wasn't that bad for me. Actually. It was more. I borrowed less than I. Sorry. I borrowed more than 90 because I paid 227, but it appraised for way more. So they based it off the appraisal price. Right. So, like, because you have these options, having cash is not as advantageous as it was unless your margins are so slim that the deals don't make sense if you have to pay a cost for the capital. But in your case, Dawson, you're. You have plenty of meat on the bone. These deals are making sense for you. You're not at that rate. I just don't think you need the capital as much as you think you do.
- [24:49]
B
So are you not worried about the tenant laws going throughout the country and being stuck with, say, I have the house, I convert the garage into an ad you. And then also that back. I have three tenants in there. Are you not worried about the tenant laws going through? Say I get stuck with three tenants that won't leave.
- [25:05]
A
Here's where that's unlikely to occur to you in this neighborhood. I would be worried about it if you were buying this Thing in Stockton, California. California. Okay. Like, tenant laws are only applicable when you're in a worst case scenario as a buy and hold investor, which is you have a literal eviction. If you ever hear this one was evicted from their property. That's worse than just, hey, I couldn't pay the rent and had to move out. If you or I came across hard times and we couldn't pay the rent, we tell our landlord, I don't have the rent and what do you want me to do? And they would either say, well, what can you pay me? Or they'd say, I want you to leave. And if you leave, that's it. They usually don't care. They put another person in there. You go live with somebody else, or you live out of your car. Whatever you got to do to be a person of integrity, you don't make them get the sheriffs to come forcefully make you leave a property you have been staying in but not paying for. That's. It's stealing, basically. You're stealing utilities, you're stealing the use of the property. Right. Evictions don't happen all the time. And when they do, there's significant consequences for the tenant that was evicted. It like when I was a cop, I tell people I don't know that I ever took a person to jail, didn't choose to go to jail. Like if, if you're trespassing and I'm like, hey, you gotta go and you leave, you don't go to jail. If you're like f you, I'm not going anywhere. Well, now I have no option but to take you to the jail. Well, I wasn't taking people to jail that really wanted to be at work the next day. I wasn't taking people to jail that were like, man, I got a lot I got to get done. It was always people that have nothing to lose. So jail's not a big step down in their quality of life. It's the same with tenants. If your tenant values their credit, values their rental history, values their integrity, they don't make you evict. I would never ever make someone evict me because of the fact that it's, it's wrong and it's going to destroy my credit. I care about that. I'm just going to leave. Right. In this city, I don't think you're going to be finding many tenants that are like going to force you to evict them where rental laws are actually going to apply. It's very rare, especially if you have a property manager that has got experience with picking the right people. You're probably going to get a tech bro who's like, oh my gosh, it's only two grand and I can have my own space and I don't have to be in a loud apartment complex who's got a bright future ahead of them that isn't going to make you evict that. They probably check their credit score more than you do.
- [27:15]
B
Yeah. Have you had better experiences hiring property management companies or doing your own self property management?
- [27:23]
A
If you're going to do it yourself, you have to understand all those laws. You have to understand how you could be violating the law. Because if there's things you're supposed to do that you're not doing as a property manager, a lot of the time they don't have to pay rent. The courts will take their side in that case. Property managers know what the rules are, what the laws are, what the fair housing regulations are. It's not fun. I think I pay mine in California, like 6% of the rent. It's not the full 10% because when rents are more expensive, they usually take less. So, like it's not fun. But it's way better to not have the risk of screwing things up, to not have the vacancy because we're busy. We're not going to be able to put time towards finding these tenants and screening these tenants and to not have the headache of the tenant texting me that something needs to be done. Also, if I do have to say, no, screw it, they're late on the rent, kick them out. It is way easier for me to tell a property manager and make them be the bad guy than if I know that tenant and now I have to go be the bad guy.
- [28:18]
B
So it kind of puts this wall between you and the tenant.
- [28:21]
A
Yes, that's exactly how it's another reason why I recommend people do it. Even if you're not going to hire a third party property manager, you need to hire an assistant that acts as a property manager. There has to be a third party in here that's a wall between you and the tenant because otherwise the tenant's going to manipulate you or try to become your friend to use something against you. You want a neutral person who's communicating this stuff that you could just make a business decision and let them go execute on it. Now, obviously you're going to have to make sure the property cash flows and you might have to put a little bit more money into it if you're going to develop that back unit adu. But if you can do that, I like that way more, especially because you're getting market appreciation cash flow. So your rents are going to go up in this area more the national average, and they're going to be going up for three units, not one.
- [29:08]
B
So would it make sense if I kept it as one unit? Do you think it would make sense to just keep it as one unit, take a small amount of equity out and rent it out and then slowly over the next couple of years, then do the adu?
- [29:22]
A
If you can make it cash flow at one unit, yeah, I think that makes sense to do it right now. If you can do the storage unit conversion while you've got your contractors on scene, it's almost always cheaper to do the work now. And here's why. Inflation makes everything expensive, right? So if it's going to cost you 50 grand to convert that thing into unit right now, it's going to cost you 70 grand to do it in five years or in six years or seven years, right. The other thing is, if you do the work later, after you've refinanced it, you have to refinance it again to try to get some of that equity out. If you do the work before you do the refinance, the equity is there when you go to complete your brrrr. Now, if rates go down and you hold it, you can refinance into an even better rate. And on a million dollar loan balance or whatever, it's at 800,000, $900,000. That's a pretty significant savings that you're going to get, right? You got the upside of getting a lower interest rate if you sell it. It doesn't really matter to you what interest rates do. If you hold onto it and then prices skyrocket. You can either refinance into a lower rate and hold it longer, or you can be like, holy cow, this thing's appreciated to 3.5 million. I'm going to sell it. You sell it for more because you've got that garage conversion. You forced even more equity when you did it. Like objectively, I see all the things leading towards. This is a more powerful wealth builder for you. If you improve the property to its maximum potential and hold it, the downside is just going to be it's going to slow down areas in the other part of your business because you're not going to have as much capital to deploy.
- [30:48]
B
I see a lot of people, especially out in the Midwest, they're buying these properties for 40, 50 grand, they're putting 60 into it and then they're instead of getting a conventional loan, they're refined into a DSCR loan. Do you have an opinion about those or. We do a lot of them.
- [31:04]
A
I bet you at the one brokerage we do more DSCR loans than anyone in the country. We were like one of the first people to do them. Yeah. We are experts in these. Where you could get into trouble with. What we're talking about trying to use a DSCR loan is they send an appraiser and they may say, hey, you didn't get this permitted with the city as an official ADU and junior adu. So we're not going to take the income that comes from these to include towards your debt service coverage ratio.
- [31:29]
B
That makes sense. But as long as I get the permits, I'm getting permits for everything. We're doing all the foundational work with permits. Like, like for, like permits. I mean, it's all clean.
- [31:38]
A
Yeah. So if you, if you're already having a good relationship with the inspector and you're like, hey, I think I want to convert that shed into an adu. What has to be done? If they give you a laundry list of stuff, that's a headache. Maybe this plan doesn't work out as good. But if he's like, yeah, no problem. Here's what you need to do. You're going to need to do these things. I'll approve it. He's make it easy for you. At that point I'd be like, well, Dan, can I make it a little bit bigger? How much would it cost if I built an extension onto it? Instead of a studio, I turned it into a one bedroom. How much could I get for rent if I turned it into a two bedroom with one and a half bathrooms? Now you almost have like a second house, just a very small one. It's already at the end of a driveway. You could run a fence very easily between your main house and that thing. And now it's almost like you got two houses on one lot in an amazing area. You have a huge backyard that's like begging for this to be done. Like now you've got a property that when you go to sell it, it's worth way more, way more than what you could possibly be getting right now. And the future, Dawson, five years down the road, eight years down the road is like, this made me two, three million dollars. I am so glad I hung onto it instead of present day Dawson. That's like, I don't want to swallow this pill. I really want that cash. I want to be able to increase My flipping business and my wholesaling business.
- [32:46]
B
I've even thought about doing. Have you heard about the new SB9 lot split laws?
- [32:51]
A
California Second, before you say that, another reason to hold it. If you hold it for more than a year and then you decide to sell it because you need the money, you move from regular income tax to long term capital gains taxes, which I think are like, are they 15% for long term? It's way less. Whatever it is, it's way less. So your tax burden goes down if you could just hold it for a year. You asked me about the SB9. Yeah.
- [33:12]
B
So one thing that I'm considering doing is doing the SB9 law where you can do, essentially do a mini lot split because there is that room on the side of the house to essentially put another driveway. So I'm thinking about keeping it, renting it out, and then instead of keeping that garage as an ADU or building, converting that garage into an adu, I'm thinking about tearing it out and putting another house in the backyard.
- [33:36]
A
Because the lot, I don't even know that you need to tear it out to build the other house.
- [33:40]
B
No, it would just be nice room wise.
- [33:42]
A
Probably the lot's big enough, you could build another property back there, which you have the opportunity to. If you keep it, you could even like keep flipping properties, wholesaling properties, keep your business going like it is, and then start investing some of that capital into building this thing. Now you've gotten away from the 50, 45% cap or capital gain short term rate, you put yourself at a 15% rate. If you decide you want to sell it, you've let the property appreciate, you've added value through building two houses on one lot. Or you split the lot, you keep one house, you sell the other house, you get all the capital back you would be getting right now in two or three years. And now you have a free house in an incredibly good area that's going to continue to appreciate and it's going to provide wealth for your family for the rest of your life.
- [34:27]
B
Yeah, I'm glad I asked you about that. That's a, that's an interesting perspective that I didn't have before we did this call.
- [34:32]
A
Yeah, there's a. I don't know that it's what you should do because I don't know how many moving pieces you have going on in your life. But I think objectively speaking, you will definitely make more money if you hold on to this thing and you just push it to its highest and best use. If this was in a rough area, my advice would be significantly different. You can't apply the same advice to every single property. But because of you, and I know this is basically one of, like, the nicest cities in the entire Bay Area area. And, yeah, the people that live there make really good money working in cities like San Francisco, Oakland, even maybe San Jose at times, but they don't want to live in those cities. They want to live somewhere where it's safe, where there's nice parks, where they have really good school scores. Like, it's centrally located. I go hiking in that area all the time. I don't live there, but I'm driving up to that area constantly. I go to church not too far away from there. So it's very hard to see that area. Not continuing to appreciate the rest of the Bay Area could struggle. That one will. All right, Dawson, thanks for being here. Any last questions for me before I let you go?
- [35:34]
B
No, I think that's it. Thanks for. Thanks for walking me through this. David.
- [35:37]
A
I know you probably came wanting to get some clarity, and I actually created more problems for you, but you're a smart guy. I trust settles. You're gonna do good.
- [35:45]
B
Yeah, I think I've got more options now.
- [35:47]
A
Very much so. Thanks for being on the David Green show, my man.
- [35:49]
B
Yeah. Thank you.
- [35:50]
A
Oh, for people that want to find out more about you, where can they go?
- [35:52]
B
They can follow me on Instagram. I. I think I've got a whopping thousand followers.
- [35:57]
A
So what's your Instagram handle?
- [35:58]
B
It's just Dawson Crittle. How do you spell cri? D, L, E. Yeah, I don't put out a lot of content, but if you have a deal you're looking to sell, I might buy it.
- [36:08]
A
We.
- [36:08]
B
We've done deals all over Louisiana, Illinois, Florida, all over the place.
- [36:13]
A
All right, so if you're looking for content, go to davidgreen24 on Instagram. And if you're looking to contact Dawson Krittle, go to Dawson Krill on Instagram and give him a follow.
- [36:22]
B
Sweet. Thank you.
- [36:23]
A
Thanks, man.