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- [00:01]
A
Welcome to Real Talk Real Estate, the show where we cover how to build wealth in real estate with no fluff, no BS and no sales pitches. I'm David Green and I've been doing this for over 10 years. I've seen the ups, the downs, and everything in between. This is the show where we pull back the curtain and show it to you, too. So if you want to build wealth through real estate or you just love learning about it, you found your home. Ethan Board. Welcome to the David Green Show. How are you today?
- [00:29]
B
Good, how are you?
- [00:30]
A
I'm good, man. We got a special show planned here. We're going to be talking about a couple of deals, actually, that you approached me about looking for some insight on. I understand that one of them you've actually made some progress on since you originally reached out. And the other one you've had a bit of a plot twist. So let's get into this thing. Tell me about the first deal. What is it? Where'd you find it? What kind of prop?
- [00:50]
B
Okay, it's a two bed, one bath, single family home. It was originally my grandmother's house and then my. She passed away. My uncle lived in it and then he passed away and so him and my aunt own the building. So the house went into probate for about two years. My aunt, I was talking to her, she didn't want anything to do with the house. So I ended up getting her half of the ownership into my name. And then like I said, two years later, we finally got signatures and everything and I got to purchase the other half. And so now I own the entire building. Single family home. But it needs some work. And what I mean by need some work is a total rehab, total gut, needs everything. It needs central heat, air, roof, electrical, plumbing, water, everything. So that's okay.
- [01:41]
A
So this is going to be a sizable capital investment?
- [01:43]
B
Yes. Yeah.
- [01:44]
A
Right. What would the ARV be on this thing once it's finished?
- [01:47]
B
So the ARV is ranging in between 120 and 130. That's kind of lenient. So I would say 130 would be about the ARV on this one.
- [01:57]
A
Okay, and you think it's going to need new heating? Was there a new roof in there?
- [02:01]
B
Yep, new roof. That's actually. That actually just got put on two days ago. So we're in the process of all that. We got the new roof on, but yes, it needs. It didn't even have central heat and air. This house was built in 19, I think 16, so no central heat, no central air. And the plumbing Like I said, it's been vacant for two years. So we're just redoing all that electrical needs to be updated, doing all that. So it's a full. It's a full gut, full remodel down to the studs.
- [02:28]
A
All right, so total, if you had to fix this property up to make it what you want it to be, where do you think you're going to be spending?
- [02:34]
B
So I got a quote. The guy gave me a quote for 75,000. I'm thinking a little bit more, you know, to be safe, 85 to 90,000. And then again, I purchased it for 10,000. So I got know with the renovations done, hopefully I'm in there for about 85 to 90,000 total. And like I said, the ARV would be about 130.
- [02:58]
A
All right. Is there any opportunity to make the property bigger or add another bedroom? Bedroom or bath?
- [03:02]
B
I mean, I guess there probably would be. I mean, it'd be. I don't know how much it would cost to add a bedroom or the, you know, the square footage on it is 916, 915 or something like that. So with the current square footage, probably not. It's a perfect two, two bed, one bathroom. But, you know, if we did add on, obviously that would increase square footage then. Yeah, we would. But then I don't know if the numbers would make sense to, you know, the ARV might go up a little bit, and it would make sense then. So that is another dilemma with this house, this property. So.
- [03:34]
A
Well, do you have any easy way to add square footage? Is there like a sunroom, a patio, a basement, anything like that?
- [03:39]
B
There is a back porch that's enclosed. That was added on probably when my grandparents had it back in 1940, but. So we were actually going to turn that into the utility room, but it's not big enough really to be a bedroom. That's why we were like, well, you.
- [03:55]
A
Couldn'T make it into a master bedroom and add a bathroom or anything?
- [03:57]
B
No.
- [03:58]
A
All right, well, those are the two ways that I focus on in Better than Cash Flow. It's a new book I have coming out about how you increase the value of a property. You make it bigger, you make it better. And then I've got all these ways you do both. Doesn't sound like bigger is going to be an option here. So better is what you're aiming for. And you're talking about central heat and air, new roof, and I'm assuming like kitchen remodel and bathroom remodels.
- [04:18]
B
Oh, yeah. Full. Yep.
- [04:20]
A
Flooring and paint also.
- [04:21]
B
Yes, sir.
- [04:21]
A
Okay, so now you're in the process of that as we're talking, right?
- [04:25]
B
Correct.
- [04:25]
A
All right, what questions do you have about the remodel, what you can do with it, where you're, you have two options and you're thinking about going one way or the other.
- [04:33]
B
So the guy that I got quoted, he's. He's got a whole team of people that do all the remodeling. He's got a demo crew, then a construction crew, finish crew, whatever. He's taking care of that. So, you know, his quote is for the 75 to $85,000 renovations with not me having to lift a finger, basically. So for me, that's great. After it's said and done, you know, we're kind of in the issue of, you know, what do we do with it? Whenever it's completely done, do we add to our portfolio and keep it as a brand new rental, or do we kind of just cash out and pay our private lender back and go from there? Or what do we do? Do we burn it, do we sell it, do we keep it?
- [05:13]
A
So you feel like you got the rehab under wraps. You're just trying to figure out about the exit right now. Is this a keep or is this a sell? All right, let's go into a way that I tend to look at those two things. First off, we always want to prioritize keeping if we can. So if you keep it, is it going to generate enough rent to cover your mortgage?
- [05:30]
B
Yes.
- [05:30]
A
All right. What would your ROI be on the extra cash flow?
- [05:34]
B
So are you asking as if with the cash flow, how much am I, you know, how much equity am I getting? Or.
- [05:41]
A
Yeah, like with the cash flow that is going to be in there, how much of your money is going to be left in the deal? In which case we could figure out the ROI and the cash flow. And if you're getting all of your. Your money out, then we talk about with the equity that's in there. So actually, we can break this down together. I get my calculator out here. How much rent do you think it's going to generate for that area?
- [05:59]
B
I think it'd be 850 to 900.
- [06:02]
A
All right, and then are we thinking that we're going to try to refinance and pull out about 95k or what's your thoughts on that?
- [06:08]
B
Yeah, I definitely want to pull and pay the private lender back. And if I have to pull out cash, great. For my next deal or whatever. Okay. But yeah, So I would say I'm going to. Yeah, I'm going to bur it go from there. I'm going to.
- [06:24]
A
So let's assume that we're doing that in this first part before we look at selling. So how much do you think your loan balance is going to be when you go to refi?
- [06:30]
B
Let's see. I would say 120,000.
- [06:34]
A
Okay, 120,000. And do you have any idea where rates are right now? Have you got that far?
- [06:39]
B
Uh, the. Well, I just bought two of the properties and they were at 6.7 or something like that. Percent.
- [06:47]
A
Yep, that sounds about right. Okay, so principal and interest on 120,000 at 6.75 is going to be 778. You're going to have tax and insurance on that. So you're probably going to hit the point where you're not quite cash flow and you're going to be a little bit under. So let's adjust that to 110, see if that helps us anymore. Brings us to about 713 on the principal and interest, which I feel like with tax insurance, I mean, you know the numbers better than me. Do you think tax insurance would be more than 130 bucks or so?
- [07:19]
B
I think it's about right for our area. So, yeah. I mean, I feel like then if you did the numbers at that, you know, we're breaking even.
- [07:26]
A
Yeah. Yep. So you're breaking even there, but you're getting $110,000. How much do you currently owe? The private money or the hard money lender you borrowed it from?
- [07:34]
B
75,000 right now.
- [07:35]
A
So you're breaking even on cash flow, but you'd be walking away with 35,000 bucks.
- [07:40]
B
Right.
- [07:40]
A
So that's one way to look at this thing is it's a form of a piggy bank. You could break even and get no cash flow, but put $35,000 in the bank that you could put in the next deal or you could borrow less, have less money to put into the next deal, but get some cash flow between the two of them. Money in the bank or cash flow every month. Which one is more important to you?
- [08:00]
B
I feel like right now it would be the. Adding another rental and having the cash flow. Because I want to, I think, and deep down I want to keep building my portfolio for, you know, my. This is called my retirement plan, me and my wife's retirement plan, our rental portfolio. So deep down I would like to do this, but since this is my first flip, maybe the numbers would work to my favor. To just flip it and cash out.
- [08:28]
A
Right. We're going to look at that one next. So if we kept it this way, you wouldn't have to flip it to be able to pull say 25, $35,000 out. Maybe. We do have to keep in mind we didn't calculate when we ran the numbers of capital expenditures, maintenance costs, property management. Are you going to be doing a lot of the work yourself to keep those costs lower?
- [08:48]
B
Yep, currently property manage my own. So yep, I would continue doing that unless the number is worked out to where I could just, you know, for 10%, let, let the property manager take over and I don't have to worry.
- [08:59]
A
About it if rents go up, I think in the future you'd be able to do that and your capex is going to be lower because like you said, you basically rebuilt it from the ground up. So you shouldn't have to worry about a roof, H vac, plumbing. Like you got all new stuff in there for that. So I know there's people listening that are saying that's not how you run the numbers. I know we're just going quick and dirty right now to look at a couple options. So if the other option would be if you didn't pull the money out, you could make a cash flow more. But like you said, that's going to stall you buying new properties. So it probably makes more sense to just find a break even point, get the cash out, buy another property. Now we also have the potential where we could sell this thing. How? You said you bought it for 10 and you think you're going to rehab it for 85 or so, is that right?
- [09:40]
B
Correct.
- [09:41]
A
And you think it'll sell for 130?
- [09:43]
B
Yes.
- [09:44]
A
So if you're at 130 and we assume closing costs here of 7%, I just updated my, my iPhone and the calculator looks completely different. It's throwing me off here trying to use this thing. All right, let's say it's going to be about nine grand in closing costs for the property. That'll include realtor commissions and whatever closing costs you'd have to pay. We ran that to 10. That puts us at about. If you could sell it at 130, that puts us at 120 and you're in for 95. So oddly enough, in this case you're basically, if you sell it, you're going to make $25,000 on this thing and then you're gonna have to pay capital gains taxes on that or if you keep it. It looked like we were Gonna be able to pull out about the same amount. That's what you were figuring.
- [10:27]
B
I said. So that's my dilemma. Like what do I do? Like the numbers are about the same or so I don't know. Based on that, it's like, okay, keep it and because you can pull out the same, still add to my portfolios and then maybe prolong the capital gain tax or whatever later on or that's.
- [10:42]
A
What my thoughts are, is you keep the equity in the property and you don't pay capital gains if you keep it. And if you could get the money out and keep the property and it's about same, you might as well. Most people don't have this option because they don't have as much equity in a deal as you have because you only paid 10,000 for this thing. Like your, your rehab is significantly more than your purchase price, which hardly ever happens. So that's why this is turning out the way it does where you could either keep or sell. And you're going to keep the same. It looks to me like you're better off keeping the property, renting it out, letting the rents go up slowly over time, getting your money out and using that as a down payment on the next brrr or flip. And that's one of the reasons that I like this strategy is you don't always have the answer in the beginning. It helps to know what your exit strategy is because you usually pick different finishes and make different decisions if you know you're selling than if you're going to keep. But that's about it. And when you're dealing with $120,000 house, it's usually not a big difference in the finishes. It's, it's not a huge difference with what you're going to do with the property, especially if you're ripping it apart and putting it back together. So you could kind of do the same thing with another deal and hold this one. The wild card we didn't talk about is the area. Do you feel like it's a rough area where you're not going to want to own real estate, or is it decent?
- [11:55]
B
Well, funny you asked that. I just bought two this year down the street from it. It is a bit of a rougher area, I would say, you know, the CD neighborhood, but in our town, the CD neighborhoods, there's still people that rent and need in this lower income area. And I value that as a property manager. And you know, I want to help people in any way I can, whether they're in a, you know, AB neighborhood or a CD neighborhood. And so I do feel that, you know, this is a rougher area for sure. But like I said, the rent is still coming in, it's cash flowing, I can gain an appreciation and all that. So I feel comfortable with this area. And just the other day the city did come up with a survey for the area showing in this exact area that they're going to do some renovation or some. Some funding. There's going to be some funding for this area to revitalize it. So I'm hoping that I will kind of curtail on these funding that they're going to provide for me and hopefully I can get it, you know, make my profit even larger. So we'll see if that happens in January or not. I know that that did happen. So it kind of just worked in my favor. Just got lucky there. So we'll see.
- [13:07]
A
That does lend towards keeping. I like that. So it looks like from everything we've talked about here, Ethan, this is a hold and reinvest the money. So now we got to figure out what do you do with future funds. And you got a second deal that we could either put the money into, or you could just have that one independent and put this money into a third one. Tell me about the second deal.
- [13:29]
B
Okay. The second deal we purchased, I had a guy come to me, said he needed some cash. I run a real estate meetup here in Owensboro, Kentucky also. But he came to me needing cash. I said, hey, I can find a buyer. I'm sure he told me what he needed. I looked at the house and said, hey, I can probably buy it. I just gotta go and see how much equity I can pull out of my primary residence. So I went to the bank. We did a second mortgage. We didn't do a HELOC or anything. It was just a legit second mortgage for $40,000. I purchased it in January of this year. And he's just been written from me. Well, a couple months ago he passed away. And so that I thought we were just going to clean it up, paint it, and basically rent it out again. Well, come to find out there were some issues, some plumbing issues, some H VAC issues. So all these issues are coming up that I'm in the process of fixing right now. And my plan is to keep this one as a rental too. Like I said, I want to build my portfolio up even more and more to reduce my W2 income or to supplement my W2 income, hopefully. But. So that's the other issue is like, what do I Do this. I got these two properties. One's a flip, one's a rental that I could just fix and keep renting or I could fix and sell it also. And so I kind of just got bombarded, which is a good thing, I guess, with these properties all of a sudden. So I'm just looking for, you know, advice on what we would do here. So.
- [15:07]
A
So is this a property you've already bought or you're looking into it?
- [15:10]
B
So I've already purchased it. I purchased it in January of 2024, rented it out, and then this guy passed away. And there's issues with it that I didn't foresee having.
- [15:21]
A
Okay, so do you want to. Should we start talking about the issues or can you give me the overall ARV purchase price? Is it currently a rental right now?
- [15:29]
B
Well, the. The overall. The ARV on this one would probably be about 85,000. It's in a. It's in the outskirts of Owensboro. It's kind of like in a country setting. It's in a. It's called. The town is called Stanley, Kentucky. It's just about nine minutes outside of Owensboro. The Inc. The. It's kind of a lower income area, but the tenants that I know that have lived in this area, they pay on time. It's lower rent too. So I'm not going to get like, what the rent. I would be if it was in town, but the ARV is 85,000. I paid 40,000 for it, and I've already put about 5,000 into renovation since the tenant has passed. And I probably got about $5,000 more, I'd say.
- [16:17]
A
All right, so is this in a similar area to the first one that we talked about?
- [16:21]
B
I would say it's in a little bit better area. It's still a lower income area, but it's in a nicer area.
- [16:29]
A
Okay, so what would you need to know to make the decision on if you should keep it as a rental, improve it or sell it?
- [16:36]
B
I guess it's kind of the same issue with the other one. I just. I mean, I feel like I know what I want to do. I want to hold it, I think to build my rental portfolio, but I just don't know if that would be the best thing to do. It is a little bit further outside of my. Where, you know, where my rentals are in town. So should I. This one's kind of like the oddball. It's like I said, it's out of the area. It rents fine. I'm sure it will rent fine. Anyway, it's been running fine, but the demographic, there's, you know, the country setting, not as many people. You know, it might be harder to find a renter for that area, but I feel like once you do find one, the renter will, you know, they're pretty, like, local in that area, that little small town feel. So I think the renter, once we find a good one, they would probably stay for a while, just based on, you know, what we know about the area.
- [17:27]
A
How much money would you walk away from if you sold it?
- [17:30]
B
Let's see, if I walked away from that one with about as much, I would say probably 30,000 on this one also.
- [17:38]
A
And how much is it cash flow in a month?
- [17:40]
B
Right now, let's see, it was. The second mortgage was about four something, and I'd be renting it for 800. So it's cash flowing, 400 bucks a month.
- [17:49]
A
And then how much do you think you have in it?
- [17:50]
B
Yeah, well, I'm still in the process of renovating it a little bit, so I'm thinking that I'm just going to go and say another. So I bought it for 40, 10,000. Renovations. I'd say maybe up to 15,000.
- [18:03]
A
But you could walk away with. We said 30,000.
- [18:05]
B
Yes, I believe so.
- [18:06]
A
And if it's cash flowing 400, that's 4800. Those numbers are going to look better than we thought with this thing. So if we take the 4800 that it makes in a year and we divide that by the 30,000, you think you could walk away with. You're actually making a 16% cash on cash return on that thing, which is not that bad right now. Is that typical of what you find out there?
- [18:25]
B
Uh, yeah, I feel like that might be actually a little higher than I'm used to having the.
- [18:31]
A
That's what I thought. Yeah. Yeah, 16 seems pretty good because my.
- [18:35]
B
Other rentals, I'm cash flowing around 200, 250 on those. So, you know, I am playing the long game here. I'm not looking to sell really any of my rentals unless somebody just comes up with an astronomical number or something. That makes sense. But, you know, I'm just building my portfolio, so I'm just stacking property, stacking cash flow, stacking appreciation.
- [18:56]
A
Yeah, well, that's. I mean, that's what we're talking about here. So there's different ways you make money in real estate. And I kind of developed this framework that we're talking about and then put it into the new book that I have coming out better than cash flow. And so I look at 10 different ways that you make money in real estate and as we're looking at this, I'm using that same framework mentally as I'm walking through these. So there's different ways you make equity. There's buying equity, there's forcing equity, there's natural equity, which is when just properties go up in value. And then there's market appreciation equity. That's what happens when it appreciates more than it would in a different area. You have something similar for cash flow. Some areas grow in rents more than other ones do. This sounds like kind of just a steady eddy neighborhood. This isn't going to be a thing that's going to explode in value. It's also probably not going to crash in value. It's just going to be nice and reliable like you need. It's going to be a 1994 Honda Civic. It ain't going to win any street races, but it's going to get you to where you need to go all the time. When you turn that key, this thing's going to start. So if you're talking about selling it and moving the money somewhere else, it doesn't sound like you have a better neighborhood to invest in. It doesn't sound like you've got better cash flow that you could go get. It's actually performing pretty well compared to your other options. But it might be a headache. Is that what you got going on that's making you think you might not want to keep it?
- [20:13]
B
Right. Yeah, I'm thinking it might be a headache, but maybe once I finish the renovations it might not. But being so far, I mean, it's not real far out, but I mean it is further out than my other rentals, you know, because I am self managing. So it, like I said, it's kind of one of those oddballs. It's. It might be easier to just take the cash and sell it or since it's cash flowing, you know, at the 16% return ROI that it might be worth holding on to and maybe I can just property manage that one then since it's, you know, returning so much better. So that's, that's another option. Yeah, it's out of my area. But have a property manager take care.
- [20:53]
A
Of it because you don't want to deal with the headaches that could come up.
- [20:57]
B
Correct.
- [20:58]
A
Okay. It does make sense from the outside looking in. And this is a really good point to get brought up because it is natural to think I'm going to transfer the headache from Myself to a property manager. I get what you're thinking. I've thought this way for years. I'm like, well, I'll hire an employee and they'll deal with it and then I'll pay them and I won't have to. In theory, that does work. And every once in a while you get an amazing property manager, an amazing employee that does deal with the things that you didn't want to deal with, and you get the headache removed from you and they get money and you get headache relief. Right. And they're your Tylenol. In practice, what I find is, you know, whether you're talking about a third party property manager, bookkeeper, CPA or an employee, it's kind of the same thing. You're leveraging a part of a job to another person. The people, especially with today's work ethic that I notice that will take that off your hands are going to care about it less than you. And they don't want a headache either.
- [21:56]
B
Right.
- [21:56]
A
It doesn't make sense that that would be true because they're getting paid to do the job to take off the headache. And I don't mean to sound like the angry old grandpa and the Simpsons that's shaking his fist at the kids playing on his lawn. Right. But I'm just. From what I've seen, and maybe your area is a little bit different. When you leverage something to somebody else that's difficult, they end up giving you the job back without always telling you they just do a bad job with it. Okay. So I've leveraged work to property managers and the properties do poorly and they take zero responsibility for making it better. If the tenant gives them a hard time, they're going to just try to throw your money at the problem. Hey, we got this going on. We need you to give me some money so I can fix it. And you're just going to be like, man. Again. Got another thing that's weird. All right, here's another check. And two years go by of doing this and then you finally figure out, oh, they're not actually trying to work through these problems. They're like a matador. And they see the bowl of responsibility coming their way and they say, olay. And they move out of the way and they just let that thing run into you. So I'm kind of at a phase in business right now where I'm noticing if this is going to be difficult, I don't want to leverage to someone else because I don't think they're going to do it. I'VE just noticed they want an easy life also and they want easy money and everybody's looking for easy money. So if this is going to be a situation with a tenant that's going to cause anybody a headache, you, the property manager, whoever, unless you got a rock star that loves their job that deals with this stuff all the time, that takes problems head on. I don't think you're going to benefit by having somebody else take it over. I think they're going to do a worse job than you, which is going to equal more money to fix the problem than what you would have spent because you would have put energy and time into. Am I making sense with that?
- [23:32]
B
Yes, for sure.
- [23:33]
A
Do you think that could be the case here?
- [23:35]
B
Yeah, I think so. You know, I don't think anyone's going to do as good as job, you know, as me, you know, as I'm not going to be satisfied with really anybody because, you know, my heart and soul is into my rentals and keeping them up. And, you know, they are mine. So if it's mine, I'm going to treat things like that. And they're going to, you know, I'm going to, you know, treat them like they're going to last forever. And, you know, since that property, you know, isn't theirs, they're just, you know, looking for that 10% every month. And they're just, you know, like you said, just going to throw money at it. Hey, we need this repair, this repair, this repair. And it's like, or we could go fix it right one time and get.
- [24:06]
A
It done correctly or tell the tenant that's not acceptable. We're not doing this every month. Right. When the tenants lay with the rent, they just start making excuses for the tenant because they don't want to go find another tenant. They don't want to not have three months of rent or whatever. So they start pressuring you to make decisions that are in their best interest, that this happens a lot of the time. And another way to look at it, psychologically to you, that property in a sense to deal with that problem is worth $400 a month plus however much equity you have in the property, plus the future upside, okay? That's your motivation level, which is that's not bad to them. They get none of the upside, none of the equity, and $40 a month, that's how much they're going to care. And that's one of the reasons that when we leverage things to other people, we find that they put such a poor effort forward is to them, that's $40 a month of incentive to you. That's $400 a month of incentive plus the other perks. So you may have to hold on to this one if you want that 16% cash on cash return, which makes this decision a little bit more simplified. Is that $400 a month worth the headache, or would you rather sell it and get $200 a month, maybe get some more equity in there, but have less work managing a tenant in an area that's not as bad?
- [25:21]
B
Right. And then to think about, you know, on my primary residence, we have our mortgage and then the second mortgage. So if we did sell it, we would get rid of the second mortgage, even though, you know, it's really not that big of an issue right now. But if we did decide to move or did decide to do something that. Or if we needed equity for another deal, you know, it's kind of locked up because this equity is, you know, or the second mortgage is caught up with this property. So could we bur it and refinance it and pay off the second mortgage and then have its own mortgage or, you know, again, or sell it? So that's kind of where we're at too, you know, that's the other dilemma is that it is attached to our primary residence in a. In a way.
- [26:05]
A
Okay. This is another reason that I like the 10 ways you make money in real estate framework, because the person who doesn't understand that concept, they're looking at your problem and they've got one way to make money, and that's cash flow. So they're going to say, if I can't get a 16% return on my money, then I can't sell the property. And they're going to hold on to that thing hating every day of their life because they're a slave to that cash flow, because that's all they can see. But for you, I've heard you mention several times, you want to grow, you want to build momentum, you want to build a portfolio, which I love. I think this is how more investors need to be thinking. Now, obviously, a part of a portfolio is cash flow. I like analogies. I look at cash flow like blood or like oil in a car. If your body runs out of blood, you die. I'm not against cash flow. I've never been against cash flow. But blood doesn't really contribute to the quality of your life. It just keeps you alive. And then what you go do like your muscles, maybe make your life more fun. You could play sports. You can do fun Stuff you can look good, whatever the case would be. Cash flow kind of functions like that. Cash flow is not the fun part of a car. Getting you to work is what you need a car to do. But if that car runs out of oil, it's not going anywhere. So you do have to make sure you've got cash flow in a portfolio. This isn't the only thing you should be talking about. You shouldn't be buying a car and only looking at the oil. You shouldn't be only looking at your health and saying, well, how much blood pressure do I have? You should also be looking at other things. When you get the 10 Ways framework and you start looking at properties this way, I would now start to look at the situation and say, all right, I'm making 400 bucks a month in cash flow. If I had to sell this thing and reinvest the money for different reasons, like you said, it frees up some of the issues with your primary. It pays off that second loan maybe helps your debt to income a little bit. You're going to lose the cash flow. However, can you go put that money into a deal that maybe cash flows less, but you add another 20, $30,000 of equity in it. Can you get a deal but this time you intentionally look for something where you could add square footage to it? That's the thing that I look for in properties when I'm literally looking at a floor plan. I don't. Everyone else I think is looking at like, well, how much would it cost to redo the kitchen flooring, the paint? They're looking at square foot times price per whatever the materials and labor is going to be, which isn't wrong. You want to do that. I'm also saying this one's got no way to make it bigger. I don't like it. That one over there has a huge basement with plumbing directly above it and electrical right above it. I could run straight down. I could basically get a whole nother house out of this thing. I could get a whole nother unit out of this thing. I could add cash flow and I could add square footage to the value to make the equity go up. If you're doing that, Ethan, you're losing cash flow every month. Yeah, but you're gaining equity. If you can start putting 30, 40, $50,000 of equity into your pocket, every or not in your pocket, I guess it goes into your spreadsheet or your net worth. But if you do that four times a year, you're talking about 120 to $200,000 of equity that you're adding every single year that you're not being taxed on. If you do that for five years, you could legit have a million dollars of equity just from these little singles that you're putting together. While your competition just can't stop looking at cash flow and that's all that they see. Well, once you have your 700,000 to a million dollars of equity in five years, that'll buy you a lot of cash flow. You can go reinvest that money into these cash flowing properties that you've now created from kind of delaying gratification a little bit. And I just think it's a better strategy, it's a better way to build a portf portfolio. It doesn't get you out of the mess that most people are in immediately if you just want to quit your job and you're obsessed with it. So I could think about you're just going to chase cash like a crack addict because that's all that you can see. So hearing this, does that make you feel more excited or less excited about the thought of selling this property and putting that equity to use to build more equity as opposed to immediately just trying to improve the ROI on your cash flow?
- [29:50]
B
Yeah, I mean I do think that is a different way to look at, you know, adding square footage. Adding that, you know, because usually I look at what's currently, you know, what, what the floor plan is right now and not really adding on to it or looking at the basement and adding that square footage that seems, you know, such an, kind of like a dumb thing that I haven't realized that. But you just, you know, you just saying that right there. Yeah. Got me excited. Yeah too. So maybe I do sell and look for something else with a basement that I could add, you know, that square footage, actually add that extra, you know, double this, you know, the square footage and add that equity that way and then do that like you said, few years, five years. And so yeah, that's a possibility for sure.
- [30:34]
A
Yes. And I also think that you have what I, you're doing what I did when I started, it was in Jacksonville, Florida when I really started to build a lot of my net worth and I was going after brrrs. I was buying like three to five a month. So not everybody can do that. But we're talking about I was buying 60 to $90,000 properties. I wasn't going, you know, crazy on million dollar deals buying five a month. And my goal was to build equity on every property and it had to cash Flow something. But I wasn't really looking at is it going to get me a 12% cash on cash return or a 14 and a half percent. I wasn't splitting hairs about that. I was splitting hairs on the equity. This one is. I could buy for 60 and I can make it worth 120, and it's only going to cost 30 grand. So I could add $30,000 of equity. Maybe another one would be worth 160 instead of 120. Then I could add $70,000 of equity. I was going after that one, even if my cash flow is 50 bucks a month or 100 bucks a month instead of the other one. And after I built a portfolio of like 30, 40, 50 properties out there, the cash flow was not amazing. There's a couple thousand dollars a month, but the equity was. And then I was able to take that equity. I was able to move it into other markets. That cash flowed much stronger. And I think I kind of leapfrogged the other people that just kept stack these cheaper properties that cash flowed well, but they didn't have the eyes to see what I did. I was looking for exactly what you said. That has a huge porch. It's screened. Man, for this much money, I could basically take this two one or this 31. I could make that porch into a master bedroom with a bathroom because the kitchen's right on the other side of the wall. The plumbing's right there. I can build myself like a little, you know, little corner shower and a bathtub and a vanity. And then I got a bedroom. I just took a 21 to a 32 or a 31 to a 4 2. I had more square footage and it's now more desirable because people are going to want two bathrooms in a property, and they don't like just two bedrooms. But I was only spending like $20,000 for that whole thing to make the property. It was like these equity supercharging jumps. You've got that same ability. I'd love to see you putting that into play in your market where your competition probably isn't thinking like that. They're probably just your typical cash flow investor. That's like all they think about is the price they pay for the house and the rents, and that's it. Those are bad. I just think that's playing checkers. You can move into playing chess. You could start to look into the future. And once you've done that, you'll get into some of the other things I talk about in that book, which are market appreciation. Equity and market appreciation, cash flow, where you pick a market that you think is going to grow. Well, you can't get into that new market without money. And you can save the money, which takes forever. Especially if you live in an area with cheaper homes, that usually means cheaper wages and cheaper opportunities. It's harder to save. But if you build it through real estate, you start taking big jumps. Growing equity. If you're putting 20, 30, $40,000 of equity into your net worth every single time you do a deal and you can ramp up to doing a deal a month, that's not chump change, man. That's like legit big money that you can be building 200, $300,000 of equity to your net worth and you're not doing anything different than you're doing now. You're just approaching a little bit differently. What do you think about that?
- [33:41]
B
Yeah, no, I think it's a different way to look. You know, like, like you said, I do feel like most people in our area, myself included, you know, we do look at that cash flow. We look at, okay, we purchased it for X amount, we're cash flowing a couple hundred bucks. We know that, you know, it has sustained itself. We're not going to get rich quick or anything. But, you know, looking at it from a different lens, like you are adding a different value that most aren't, then, yeah, that, you know, could easily take off in my market too. Yeah.
- [34:11]
A
All right, well, I'd like to see you make a concerted effort in this area of looking for distressed properties, buying equity, forcing equity, making them cash flow, and then waiting to see what you do. And occasionally you'll get one where you're like, man, I built the equity, but it's not going to cash flow. Then you sell them. Right. It's awesome. When that's your backup plan is you can just sell that property to somebody else and you can still take the money and then you could just do two next month instead of one and you can pick up the momentum like that snowball that gets bigger. Any other questions? Anything about financing that you're curious about or strategy we can talk about? Before you go off the top of.
- [34:50]
B
My head, I don't have any questions. I know you have your lending business also, so I would. I mean, it's kind of curious to see, you know, what your numbers are. Whenever you like, you could take this deal and say, hey, if you were renting or if I was borrowing from you, what would the numbers look like and would it make sense? And then maybe next Time I give you a call, you know.
- [35:11]
A
Yeah. I will tell you in general, when you're playing in the pool that you're playing in, which is the cheaper loan values, the loans are kind of like, more expensive per capita. I know that's not the best phrase to use, but like, per dollar, they're more expensive than bigger loans. So lenders in general don't like going through all the work of underwriting to lend out 50 grand or 70 grand. It's the same work as if they lend out 700 grand. So what you find is that the more money someone starts to borrow, the cheaper the cost of borrowing becomes. And that's true at our level. We're buying individual homes. And it becomes even more true when you get into like funds. So, like BlackRock, they can borrow billions of dollars, is going to pay a way lower interest rate than someone who's going out and buying a $20 million apartment complex that still has to use agency debt. They can' compete with people that borrow more money. So as a general rule, I've just learned being in the industry, the more you borrow, the cheaper borrowing becomes, which coincidentally makes cash flow harder. And so that's another reason I'm like, yeah, the goal is not to just build a huge herd of cats. Like, you want to try to build up this big foundation to move it into areas where you have more of an advantage. Because lending becomes cheaper, closing costs become lower for the amount of money that you're borrowing. And you can get bigger chunks of equity per deal if you take the skills you're learning here and you go buy a house. House for 700,000 that you make worth 1.2, that'll buy you a whole lot of duplexes in the area that you're at. With like, one successful flip, you might even be able to figure out a way to 1031 a $400,000 flip like that into 10 of these kind of properties that you're buying, where you can get to the cash flow. I talk about that's like the monopoly method in the book. I talk about you get four small little greenhouses, you 1031 them into one big hotel, and then you can sell that hotel, or that hotel puts off cash flow, which you then invest back into the Greenhous houses again, and you start figuring out a way to build the momentum, moving the equity back and forth without paying taxes on it, as opposed to the strategy of just work a W2, pay a bunch of taxes, take the little bit you got left, and then buy real estate. Which you then pay taxes onto. The lending structure that you should be using would be bridge debt to buy and then refinancing into conventional or DSCR loans. So you can figure out like we have products where you can borrow 90% of the purchase price and 90% of the rehab. So you're only putting in 10% of both, which is like pretty not like for this deal you're talking about here, that would have been like nine grand out of your pocket to be able to create $30,000 of equity. That's a pretty good ROI, right? And so then once you've added the equity through the bridge financing, then you refinance out of it into a conventional loan until you run out of those and then you start using DSCR loans. But if you get a good deal flow and good contractors and you can oversee the work, Ethan, you could have several of these things going on at a time without needing nearly as much capital.
- [38:01]
B
Gotcha.
- [38:02]
A
Yeah, thanks dude. I really appreciate you reaching and running these deals by us. If people want to follow you, do you have a website or a social media handle anywhere that they can go?
- [38:09]
B
It's. It should be Ethan Board on my Facebook. It should be Ethan Board Realtor on Facebook and Instagram so you can find me there.
- [38:19]
A
And what area do you service? If people want to hire an investor friendly agent, it'd be Western Kentucky. Western Kentucky. There you go. I always try to figure out by people's accents where they live. I'm still learning the South. South. Gotcha. I've rarely. I haven't traveled much because most of my life was spent just working all the time. It's only the last five or six years that I've really traveled at all. I'm going to be moving to Oklahoma pretty soon here and I want to go explore the South. So all of this like nuance, I'm just learning. I would have thought Oklahoma was the South. It turns out the southern states don't claim Oklahoma as the south, but neither does the Midwest. So what is Oklahoma? Is it just a stepchild that doesn't know where it fits in and what it's doing? How do you consider it?
- [38:57]
B
For me it's. To me it's the West. It's way west. So you know, it's weird how they in my opinion, like Kentucky is not like Midwest. But I mean it is whenever, you know, you go way back to the beginning of the United States. But like it doesn't feel like.
- [39:12]
A
Yeah.
- [39:12]
B
To me, Oklahoma is definitely west for me.
- [39:15]
A
That's funny man. Like In California, I would have thought Kentucky is 100. The south, like, it's all. It's all the south, right? Like, yeah. I don't know anything about it. Same as the East Coast. Every. I've only been there a handful of times, but I'm always amazed how close they all are to each other. Yes. When I hear about, like, New York and Philadelphia, I'm picturing these things, like, 10 hours apart, because that's what it's like in California. I can drive for four hours and still be in Northern California. Not only just California, it's like, that's still kind of our own hood.
- [39:43]
B
Right.
- [39:44]
A
Our own area. And then I go to some of these other places and, like, you could drive four hours and there's a radius where you might have visited 12 different states. Like, that blows my mind how they even keep it all in track.
- [39:54]
B
It really is crazy. Yeah, yeah, that's.
- [39:56]
A
We need a realtor from the area that knows it. All. Right, Ethan, thanks for being on, man. I appreciate you. We'll see you again.
- [40:00]
B
Thank you.
- [40:01]
A
Thanks for listening to Real Talk Real Estate. If you would like to be featured on the podcast, I'd love to have you visit davidgreen24.com Ask and submit your question there. Also, please do me a huge favor and share the show with someone that you love, that you think would benefit from his message. And make sure you're subscribed to get notified for future episodes. If you want to reach out directly, you can also DM me on Instagram or social media and Check out out DavidGreen24 combination.