Real estate during a crisis

Real Estate Investing During a Recession Or Financial Crisis With Coach Carson | Ep 203

In Today's Episode

Conversation with Chad Carson aka Coach Carson 

What you'll get out of today's show

  • How to manage your relationships with your tenants who in many cases their jobs are disappearing.
  • How to do disaster planning and calculate your burn rate with regards to your real estate portfolio.
  • Avoiding a real estate apocalypse amidst incredible economic uncertainty.
  • How to keep the money flowing, your financing options beyond a traditional bank.
  • What should new and aspiring real estate investors be watching for in current times.

Related: House Hacking With Coach Carson

Resources mentioned in today's conversation

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Transcript

Jonathan: All right, everyone, we have an awesome conversation teed up for you with Coach Carson, there's at least five big ideas I want to make sure that you're watching for and you're taking action on. Number one, how to manage your relationships with your tenants who in many cases their jobs are disappearing. Number two, how to do disaster planning and calculate your burn rate with regards to your real estate portfolio.

Brad: Number three is avoiding a real estate apocalypse amidst incredible economic uncertainty. Four, is how to keep the money flowing, your financing options beyond a traditional bank.

Jonathan: And number five, what should new and aspiring real estate investors be watching for in current times? We're going to cover that and more, but before we do, we'll be right back.

It's interesting, there's really no free pass right now, there's very few safe harbors when it comes to sources of investment. If you have a business, your business has probably slowed to some varying degree, maybe come to a standstill. If you are in your investments, especially if you're heavy in equities, your equities have been incredibly volatile and you probably have mixed levels of confidence for where the next several months are going. And if you're in real estate, so let's cover all of these, if you're in real estate, well great, you have these properties at varying levels of leverage, but the rents on your properties are being paid by tenants whose jobs in many cases, either have or may disappear in the coming months, there's job insecurity. And so with that in mind, I think we're kind of looking for experts in their various industries and we're bringing those on to highlight best practices, what are they doing? Just kind of get their mindset because there's something, there's information to glean and there's wisdom that can be incorporated potentially in your own life in terms of what those best practices might look like. So to help me with this, I have my cohost, Brad, here with me today. How are you doing buddy?

Brad: Hey Jonathan, I am doing quite well. Yeah, it really is impacting every aspect of the economy like you said. And real estate is something we haven't really touched on in these financial resilience episodes. And Chad Carson was the person that I thought of that is really a large, small-scale investor if you will. And he has the pulse of maybe what's going on out there in the real world. I mean, I've seen some of these kinds of horror story articles saying, according to the national multifamily housing council, 31% of US renters didn't pay their rent between April 1st and April 5th. And to me, that was this cataclysmic type number but I haven't really heard any follow-up from that and I haven't heard anybody talking about that in our ChooseFI main group or our local groups and that was really the impetus for bringing Chad on just to kind of talk about what's going on, what are small time real estate investors doing and just to get his expertise and his thoughts. So Chad, with that, welcome back to ChooseFI.

Chad: Hey guys, thanks for having me.

Jonathan: Brad, I think somewhere in there may have mentioned like small scale investor and I wanted to actually throw some context in this and that I think what you're doing is you've taken this single family approach as opposed to investing in large apartment complexes and REITs, but you've taken a small scale approach and you've scaled it dramatically. And when we talked probably close to two years ago now, I think you had 84 doors, 84 units that you were renting out. And you started this, I believe as far back as when you were in college, you started mapping out this path that you're on now that's given you incredible freedom and flexibility. I know at this point you and your family are financially independent. You are running your business from Ecuador for well over a year and a half and I believe y'all are... You have a pretty awesome, fantastic lifestyle, but you have a lot of units and that means you have a lot of exposure. And so while someone might anecdotally say, "Oh well, this hasn't really affected me." I mean with, with 89 units, that's a lot of families whose economic situation, your business model's exposed to. And so yeah, to Brad's point, I think this is a great place to start. What are you seeing out in the marketplace? Brad mentioned an article where some absurd number of tenants aren't going to be able to pay their rent, is that mapping out to what you're seeing as well?

Chad: It's not mapping out exactly. Now, I'll give it some context on my end too. We've done better than that, in our own business we were nervous, just like a lot of landlords in April, we are nervous for our tenants because they're losing their jobs and our livelihoods of our tenants and our business is very closely intertwined. So it really kind of exposed that positive relationship we have between our tenants, but also, we're nervous about that. But ended up in April, we had about 93% of our rent that we collected. So it wasn't as cataclysmic as we thought it would be but that doesn't mean May, June is not to be, it might be a kind of a delayed effect. And I don't know the difference between some of the national stats that I've seen as well and what I've really heard on the ground talking to other landlords like me who were just kind of smaller landlords. Most of us have been in that 90% range is what I've heard from a lot of people. But the big picture is that we are affected by all the same investment themes that hit other people. And whether you're a small business, whether you're a big business that rent coming in, it's kind of the stability of what we all do. But I have been pleasantly surprised that it's sort of shown me that residential was always our focus. And I always kind of intellectually said, "Hey I think we should invest in homes where people live because that's one of the most important things." I mean, you guys talk about it all the time, what are the most important parts of your budget? Well, you look at food, you look at your medicine, and you look at healthcare and you look at your house. And so yes, things get really bad. But if you have houses that attract responsible tenants who are good people, which we have for the most part, they're going to... they want to pay their rent in a lot of cases and if they can't, which we have had people who can't pay then, yeah, let's work together, let's figure out a way to either put some of the rent off or reduce the rent, we could talk about that more. But I think that's been what I've seen is just people coming together and working together and trying to figure out ways to get through it.

Brad: And Chad in terms of working together, so 93% that sounds incredible. I mean that's again, when you hear this doom and gloom, you just don't know what to expect, so I'm sure you were pleasantly surprised with April. And I'm curious of the other 7%, I think you have somewhere around a hundred units now, so we're talking probably seven or eight units did not pay in April. Did people reach out to you proactively? What does that even look like in terms of, "Hey, I can't pay."

Chad: So we have a few different ways that we communicate with our tenants and we actually have property managers who manage a good bit of what we do now. So I used to self-manage my business partner and I would do everything, we've kind of evolved to where we have a team that does it. But so in a lot of those property managers have student rentals. So we're in a college town, Clemson University and so they communicated with a lot of the people well before April 1st and we had a conference call and I was talking to them about, "Hey, what's our strategy here? What's the messaging?" And the main thing I wanted to convey to the tenants was that we're in this together. This is not some big huge corporate landlord who just doesn't care about what they're going through; number one, we care, number two, we're in this together, so please communicate if you have any issues. We didn't give a lot of specifics, but we just said, "If you have issues, let us know, let's talk, we'll work it out." And so that was the main message we communicated, whether it's through our property managers and then we still have some that we self-manage and I actually reached out because a lot of these are my longterm tenants who I've known for years, not student rentals, these are just families. And I just texted them all earlier in March and said, "Hey, this is unbelievable what's going on, just want to check with you, how's your family, how's everything going?" And I think that's the difference between a lot of what the national statistics you see in this small scale landlording that I think a lot of your listeners probably who have real estate are at that boat is that we know our tenants, the tenants know us and this is personal and I think that makes a difference.

Brad: Chad, we were saying before the COVID really all real estate is local, and I think maybe some of those national stats you hear are maybe skewed by large cities like New York or thereabouts. But I think again, all of all real estate is local. You are in a college town and most colleges, if not all colleges are not having students on campus right now and who knows what's going to happen in the fall. I was reading an article before we signed on to this about college enrollments dropping because there's so much uncertainty. I think uncertainty is the buzz word just now in general in life and we don't know what the future is going to be, but Clemson sounds fantastic for a hundred units when school is in session but man, have you thought through what happens if this is delayed until the fall or into the spring?

Chad: Yeah, it was actually... my business partner and I have had several conversations, but it was one of our first like, "Uh-oh, we better figure this thing out," was thinking about that, that, all right, school is going remote and not all of our units are college student rentals, luckily, so there's a little bit of diversification, but definitely over half are. And so we have a big exposure to college student rentals. And one of the main things we thought about, and this is probably pretty consistent with people who are not in real estate, just regular businesses, regular investors, your personal business is that you got to have a lot of cash reserves to play the game. And I know that's just one of those fundamentals you guys talk about a lot as well, but we went back, the first thing I did was just totaled up like, "All right, how much cash do we actually have?" Because you can talk about all the strategies you want, you can talk about the what-ifs, but when you have uncertainty like this, this is what I learned in the 2007 and '8 downturn that we had to survive and get through as well was that cash is still king, that's what gets you through uncertainty. And first and foremost is just playing defensive, if you're playing sports, you got to play defense first to win. And so defense is having cash, being able to, if it is the right thing, to give your tenants some leeway for [inaudible 00:11:36], yeah, can you do that financially? If you're completely stretched because you don't have enough cash, it's going to be difficult to make some of those decisions because you're going to kind of make decisions from desperation and motivation. And I know, for people who are listening, if you didn't have the cash ahead of time, it's not going to help you right now but the message I've been giving for myself and everybody I know is that look to wherever you can both kind of plan A, plan B, plan C, just so that in the worst-case scenario you could get through these ups and downs and figure out exactly how long you could get through; what is your total burn rate? How much do you spend every single month in your business? Just like you figured that out in your personal life and then you multiply that times some variable. I like to use six months as a minimum, could you go six months without getting any rent on your properties and still pay your mortgage, taxes, insurance, maintenance, all of that, as kind of a minimum. But we as we started thinking about the school shutting down we're like, "Okay, this is interesting, college student rentals used to be like the recession-proof asset class within real estate but here we go, here's uncertainty." So we started thinking, "Well, maybe we could have nine months, how could we raise 12 months? Or could we put some things together?" And I don't think it's going to come to that. I'm a sort of a more of a realistic optimist and I think something's going to change. But I am preparing and we're preparing that if this thing goes longer than a couple of months, what would happen? What would happen this fall if we only got half of our rent or 25% of our rent? And what would that look like?

Jonathan: Yeah, and speaking of variables as part of your equation, your disaster planning, I'm sure there's other variables because that's at a fixed rate. So at a fixed rate maybe you only have 25% people that are able to pay, but if the market becomes less competitive, maybe your rent, your rates drop, which makes you more competitive in a less competitive market. So it's not just full rent or nothing it's, "Oh, market demands means we can only bring in 75% of what was the market rate in the spring, but when we do that, we're more competitive than anyone else, so we're more likely to get a tenant," something along those lines. Does that go into your... or maybe, "Do we do a short term lease?" Like, "Hey, six months at this rate," or something like that where you're not locking yourself into these losses, has that entered into your calculations?

Chad: Yeah, all of the above. When you're thinking about being flexible, it's not only the... what's the amount of rent? Could we lower the rent if we needed to? Could we offer incentives? Could we change the type of tenant we rent to? If college student rentals didn't work, could we go find other tenants who are short-term and who just need... we have a lot of Duke Energy workers who come through and have to work at the nuclear power plant nearby. So, my business partner and I, earlier in our career, we started talking about backup plans as well. And we had this joke that if things get bad enough, there's always something we can do. And to the point we used to have houses that we were trying to sell because we were flipping a lot of houses and we would judge how bad it was getting like, "This house is not selling? "Okay." "Can we drop the price?" "Yeah, let's drop the price." And eventually, we would say, "If it gets bad enough, we're just going to hustle and get out there." We had seen these stores out there where people would jump around with a sign saying, "Hey, there's gold for sale." Or there's something for sale. I was like, "I'll get a monkey suit on and put house for sale, jump around." That showed ourselves how desperate things were getting if we need to get out in the street and kind of jump around and try to fill this house up. But all jokes aside, to me, that's being an entrepreneur. Entrepreneurs have to be flexible and real estate is very entrepreneurial and there's always something you can do. Financially, you need to have cash, but there is something you can do, you can be creative and you just need to get one unit rented at a time and so that just means talking to one tenant who might want your place for a certain price and we found that that kind of attitude of just hustling and working hard and get things done is what gets you through some of the tough times.

Brad: Chad, I'm curious. I love this concept of hustling and really creativity." Right at the heart of it, you're thinking creatively, you're thinking like an entrepreneur as you said. Using that as an example, Duke Energy I think is what you said, are you reaching out to these plan B, C, D type people now? Six months ahead of time and there might be a 5% chance that comes into play, but are you kind of digging that well now to create relationships so it's not you and every other landlord in Clemson who on September 1st if the school isn't opening they're all lining up at Duke Energy? Do you think like that in terms of these, I guess, alternate plans?

Chad: It hasn't gotten that far. I think it's more the preparation we've done is like mental rehearsing, kike let's rehearse how this might go and also relationships. And I think that's another key point that I didn't make earlier that relationships with other people who are going to help us lease our properties. We reached out to a vacation rental company last year and I'm friends with the owners and they've helped us run a couple of our properties, just experimenting with vacation rentals. Well, right now they're taking a big hit, but they also have access to that short term rental market, people who need two months, six months and three months. And so I think for me, it's just having a diversification of really good, close relationships with people who I trust and that's... so I've reached back out to them and said, "Hey, if plan B needs to come about we might be calling you about those Duke Energy workers," or something else. But at this point it hasn't gotten to that point where I think it's even remotely, need it yet? Probably plan B for us is if college student rentals aren't going to come in the fall, we've already pre-leased a lot of our units for the fall actually like maybe 70, 80% of them, which is kind of a cool thing about college towns is you work really early on to try to lease stuff. So back in January and February, our property managers were doing that and so we... I think the more proactive part we're doing now is reaching out to those tenants to maintaining those relationships saying, "Hey, how's it going? Are you still planning on coming back in the fall? What do you think?" Not taking that for granted and then communicating with them and maybe a plan B is, hey, if there's no school this fall and they're not coming back to the campus, some of them will, but maybe some of them won't maybe we can reduce the rent say, "Hey, would you like to maintain your unit just to come back sometimes and then go, come back in January when there is school?" So there's I think just listening and talking to your customers and understanding what they're going through and then trying to translate that to a financial picture is more of what we're trying to do now. Just keep all your options open, talk to people. But it's probably going to be okay. It just might work, it might be one of those 20% discounts, 30%, so that's where the cash comes back in, you just got to be prepared to be flexible if needed.

Jonathan: I have a question about what you're seeing in the real estate trenches. Real estate's one of those vehicles where you really see a lot of, "Hey, no money down, get rich with other people's money, there's no risk, 10X your life," all these kinds of things, and I'm just curious in the context of what you're seeing now, there's that saying, you find out who's been skinny dipping when the tide goes out, and from your perspective, what are you actually seeing inside the industry and what's the situation that turns something like this into truly a real estate apocalypse.

Chad: Real estate's a little slower to respond. So one of the positives and negatives of the stock market is you see it, it's almost instantly the psychology the market shows itself. Real estate, if you talk to real estate professionals, sales agents, property managers, they like to stick their head in the sand a little bit for a while. So for a couple months they're like, "Yeah, things are great. Real estate is great. It's always great, always goes up." But my experience there in 2007 and '8 was that the biggest challenge or the thing that can knock a real estate investor out of the game is lack of liquidity or lack of cash flow and we talked about that earlier, having reserves. But I think the thing that we're going to find out is that some investors didn't have enough liquidity so they didn't have enough reserves and all of them are hoping that this thing's done in two months and if it's not done in two months you'll start seeing some people missing payments, some problems like that, but the other part of that is just leverage. I mean, real estate is a leverage game and people borrow money to do it and I'm okay with that. I think it's a reasonable risk to take but not all leverage is the same. Getting leveraged with really high payments that you have a difficult time covering, like a 15 year mortgage, I'm not a big fan of really high payments like that because it gives you less flexibility in times like this where you need to lower your payment, where you need to kind of go to bare minimum. And so I think some people are going to struggle a little bit with that who have less cash flow on their properties, who they were speculating on things getting better and it brings it back to the fundamentals that real estate, you do make money with growth and appreciation and all that, but it's like the stock market, you have a lot of ups and downs of growth in price over time. The gravity of real estate is rent, it's the amount of income you can produce, how much can it cover your expenses? Is there a margin of safety there to cover your mortgage payment if you do use leverage? So that you can reduce your rent and have a deflationary period like this potentially, where the rent might have to drop a little bit and soften up and you could still survive without going into negative cash flow territory.

Brad: Chad, for those people who are over leveraged or don't have the necessary liquidity, some of them are going to default to not being able to pay their mortgage. Do you have any sense of what percentage of those people like that needs to happen before there is some tipping point that Jonathan used, like a real estate apocalypse? And we're not forecasting this obviously, it's just more, it's a thought experiment. Obviously it's not okay, 70% needs to fail before prices start dropping, I assume there's some tipping point at five, 10, I don't know what the number is obviously, but can you give us any sense of that?

Chad: I think at one sense we're a lot better off than we were during the last kind of true real estate crisis in 2007 and '8. This is a crisis created by a health concern, legitimately shutting things down. The world needed to shut down and so jobs are related to real estate, so that's why real estate is also in the crisis with everybody else. But it's a little different because last time real estate was sort of the lead indicator, was a cause of a lot of the problems and you had a lot of bad debt, you had a lot of bad mortgages and the banks then had essentially like a financial problem within the banking system that kind of spread to everybody else. And so this time around real estate was actually pretty healthy in a lot of markets it is very local, but the supply-demand relationship was pretty good, at least in my area there wasn't a lot of overbuilding. In 2007 and '8 builders were just crazy overbuilding, too much supply. So that relationship of supply and demand is like the core part of it. The thing that I think will be the indicator is how long this lasts. If we have job losses, we have huge unemployment for an extended period of time, that's an issue. People are going to have problems keeping their houses and so if you get a certain number of foreclosures, then that becomes an issue for the banks, they have to take them back, that affects the prices of the market and so the tipping point is more about the amount of foreclosures the amount of people lose their houses. But I think the incentive for a lot of banks, and this is something else that was learned in 2007 and '8 is not to necessarily take all those to market, that's he worst thing that banks can do. Working with their borrowers, redoing the terms, extending the terms, putting some of the money on the back-end of the loan, I think we'll get to that intermediate step before we'll get to the mass amount of foreclosures.

Jonathan: All right everyone, next, I think we need to ask Coach Carson for those real estate investors or aspiring real estate investors, those that are on the sidelines, is this the opportunity of a lifetime or is this a let's wait and see opportunity? We're going to get his perspective, but before we do, we'll be right back.

All right, Chad, I have another scenario I kind of want to set up, I think it's going to be valuable for people and that is the opportunities that are going to come out of this. So we talked about you as an existing landlord with I believe now close to 104 properties. You have been following this path the whole time, but we have individuals that have been sitting on the sidelines, they've done all the research, they've taken all the courses, they have prepped and they are just waiting for a deal, they're looking for that first deal and right now there's a lot of uncertainty in the air, but at the same point they got that Spidey sense going off that like, "This might be it." Sometime at some point in the next several months, this might be that opportunity. What are those leading indicators that individuals should be looking for? If they had a one on one with you and they were picking your brain, how would you counsel them as they're waiting to tackle their first deal?

Chad: Yes, good question. Something came to mind to me, Warren Buffett came to mind because his advice is when other people are greedy, you should be fearful. In real estate it's not been super overheated, but it's been hot over the last couple years and people are feeling like it's a little bit of a bubble perhaps, but then if you're just on the sidelines waiting, recessions are always the best time to get started because the prices are more in line with the rents and you can find deals below their intrinsic value. But here's the challenge though. So if you're waiting on the sidelines, do get prepared, but this is always the challenge is that real estate is a pretty expensive game. You've got to come up with hundreds of thousands of dollars sometimes to buy a property, which means you have to get financing to buy that property. And what always happens is when the best opportunities are out there, financing is the most difficult to get. Banks are going to be more strict with their lending requirements, they're going to have debt to income ratios are going to be more strict, they're going to have down payment requirements that are more strict. So I guess the message first and foremost is just be prepared for that. That you need to save up more cash, you need to have a bigger down payment. But also the thing that I've done all along, and this started off as a necessity but I've evolved and continued to do this over time is to not always depend on banks for your money. I got very creative early on. I just graduated from college at Clemson University and I was basically not bankable. I stepped into the bank and said, "Hey, will you lend me money? I'm a house flipper, I like to flip some houses." And they're like, "Who is this guy? Go away." So what I had to do is I had to get creative and go to other investors who had money. People who had a self-directed retirement account or they had money in a retirement account and didn't know that they could loan it to me to buy real estate, or I went to other more experienced investors who will be willing to partner with me on a deal. And so I think that's one of my main messages is if it really does become a time where there's amazing deals, that's also going to mean that there's not as much liquidity in the market and a lot of people are going to be... are out of the market because they can't get the money. So yes, be prepared, look at the locations, go to all the fundamentals of real estate, that doesn't change. Is this a good location the best in long run? Is it a good city, is the population growing? But then number two, get your money in order and have a plan A, B, C, and D for your money because that's going to be the key to be able to actually pick up any good deals.

Brad: Chad, you talked about fundamentals. I'm curious for people who haven't maybe heard our prior episodes on real estate, can you talk people through just real quickly the fundamentals of this 1% rule of thumb that people talk about and things like that? What should someone be looking for in your estimation? Just in terms of the numbers of, obviously you need some way to, "Hey, I've got 100 properties that I'm looking at," how do you initially call that list?

Chad: Yeah, I think there's two fundamental ways to evaluate real estate when you're trying to figure out is this a good deal? The first part is less about numbers and it's more about the quality of the real estate and the quality of the market you're investing in. And so that has to do with things like if you're looking at the region you invest in, you guys are in Richmond, what you would want to know is, is the population increasing in my market? Are people wanting to move in? If people are moving out that's bad for real estate, the prices are tending to go down. But not only population, are jobs coming in? Is there income? Are incomes growing? Are there demographic trends such that people with income can actually rent your houses or buy your houses? And that's not really difficult to find out. I mean, you can look at Chamber of Commerce, you can look at the census and you can get a rough estimate on your area. So that's like a quality fundamental for the big picture but you also want to take that and kind of zoom in, Google Maps style, like zoom into your neighborhoods and look at it street by street, neighborhood by neighborhood and you want to find the pockets of your town that are really high quality and kind on the upward movement; the trending is up. So these are places that maybe used to be a little bit more run down, there used to be more rentals and landlords there, but now it's trending towards more home ownership at this point, there's people fixing up houses. So look for those construction signs, look for those dumpsters where people are remodeling houses. That's a positive sign if that's happening. So that's part one, and part two though is the numbers. You still have to look for properties that produce good money and produce good income. And for landlords who are buying properties, I mentioned earlier that income is the kind of the gravity of the real estate universe, is that you want to use some kind of indicator that the income is going to make you a little bit of money on a monthly basis. The 1% rule is something a lot of people in our community use. Just a sort of a really rough first rule of thumb that if you're looking at a lot of properties and there is a property that is listed for $150,000, for example, if the rent was close to 1% of that, so maybe $1,500 per month or at least close to it, 1400 bucks, 1600 bucks, you would then be able to say, well, that has a reasonable chance of producing cash flow. That's not the end of the story, I need to delve into the expenses, I need to look at everything else, but it's just sort of a rough rule of thumb if your goal is to produce cash flow with your rental property. And that's not always the case, there are some people who buy properties with more long-term kind of growth, this area is going to grow, and so you can make the argument for buying a little bit below or not as good as the 1% rule sometimes, but for most people who are just starting, I think that's a good rule of thumb, its kind of is a discipline you can use to make sure the income has a good relationship with the price. But then also don't forget about the location, that's the mistake I made earlier in my career. I would go look for great numbers, "Wow, that's a great price, I'm buying it really low, the income's awesome." And I would discount the location and I would buy these really awful houses or awful locations and an old rundown house with the neighbors are dealing drugs and I couldn't even collect that rent that was good on paper, but I couldn't translate that to a real investment, so I think you have to balance those two. And sometimes the best deals are the ones that aren't the best numbers, but you have a really good location with reasonable numbers or decent numbers, but over the long run, that'll actually make you more money.

Jonathan: I think about the energy that individuals put into something like a resume or CV or something like that, and I'm thinking if you could take a fraction of that energy and put it into like a one or two-page sheet or document that says, here's the area I'm looking at, here's the metrics that are coming back, here's the property I'm looking at, here's how it fits the 1% rule, here are the expenses, here's the anticipated inflow or cash flow from this and probably there's a list of other metrics that a good presentation would actually have. And then you right along with that, you cultivate this network of... and as you said, I believe you were talking about, there's actually a lot of people that you could choose to pick from, I mean, if you find the deal, if you can document the deal, the money's going to be there, it's basically, that's the hard part. And then I guess, so there's two skill sets, how do you find the deals and document the deal? Skill set one and then skill set two, how do you cultivate a small network of potential investors and be able to connect those two together? And if you can pick up both of those skill sets then you're in the game, no matter what is going on in the market.

Chad: You hit the nail on the head and I actually, I listened to your episode Jonathan, where you talked about your investor policy statement and it kind of was a light bulb for me, because that was exactly what I do with my real estate investments. I had basically a sheet that writes, here's a one-page of exactly what I'm looking for, the location, the type of market, here's my strategy, here's why I'm doing that and I share that with my investors, I share that with my realtor, people who are looking for deals for me and it really helps me have clarity on what I'm looking for and it makes it easier to find those deals, that's one of the biggest challenges. Whenever I talk to people about real estate, they're like, "How do I find a good deal? I understand how to run the numbers, where do I find it?" And part of it is just that knowing what you're looking for. If you don't have a clear idea of what you're looking for, then you're not going to find it, you're going to say, "Oh, everything's a good deal." No, that's not the case, you need to say this location, this price range, and then they'll start popping up on your radar at that point.

Jonathan: There's one more question, it's kind of tied to... let me see if it's worth it. All right, cool, let me try this real quick, so one thing that's really interesting, I think that, it's a hangup for those of us that haven't spent a lot of time in the real estate is we think that the money comes from the bank; we find a deal and then we get the bank to work with us. And most investors, once they get past their first or second deal, they've kind of moved on from maybe that traditional environment and they have more probably investors than they know what to do with and I'm sure your point, you have plenty of investors that you could work with, you work with the ones that you want to work with. And so I'm just curious in that sort of scenario, what sort of rates do you see, and I know there's your traditional banking environment where you need to have a significant down payment, you need to have a W-2 income job with a certain number of tax years that you can present, et cetera. When you're talking about someone that has a self-directed retirement account or an investment partner or a hard money lender, what are the different rates and terms that you see out there that are kind of market rate, not definitive, I'm sure there's wiggle room on either side, but what are you seeing for someone that's maybe past their first deal? What are they able to get and how do they decide who they want to approach?

Chad: Yes, I'll just give you some real numbers from my life and both as a borrower and as a lender. So I have, on the borrowing side, we have almost all of our payments that we make, and really for the last 15 to 20 years has been the same way, had been to individuals instead of banks, we have, I think, two bank loans right now, that's it. And so the rest of them are two people with self-directed IRAs or others private investors and we pay, in general on those, 6% as kind of a base number for us. We have a few of those that are a little bit lower, 4 1/2% but that has been, it has happened over time, that didn't happen right away, when we first borrowed money from, there's a guy named Louis was our... is a professor at Clemson and he was an awesome business professor and I followed him around and kind of chased him down and ask if I could go look at some of his properties with them, and he was a real experienced investor and he was one of my first lenders. He loaned me money and we had the loan, he loaned us money at 10% interest when we first started. So that shows you sort of the range, I mean 10%, 12% maybe a little bit higher today because people's perceived risk is a little bit higher. But I think you mentioned something earlier, Jonathan, as a real estate investor, you really have to get down to understand that there is the deal itself and how good of a deal that is, and then your job is then to match up that deal with the money. And I look at it, I look at it like eating a pie or something, I really like a sweet potato pie, and so if I go out and find a really good sweet potato pie and I don't have the money to buy that pie, but here's Brad who likes pie as well and we want to share this but he's got the money, I had brought the pie, I would be happy to give Brad half the pie if we can both eat it and share it. And that's the way I look at it, in general, whether it's partnerships, private lending, whatever the case might be, you've got to get really good at understanding how big your pie is and the bigger you make it, the easier it is to share it with a lender or with another investor. And then figure out a way to split it up, and if you're a brand new beginner, when I first started, I was willing to give three-quarters of my pie away. I don't have any pie, I'm hungry, so let me give it away, and if you have that kind of attitude where first and foremost, you get good at finding deals and then number two, you look at your private lenders and the individuals who are going to loan you money and you take care of them and you make them the most important person in your business. And that's what we did, we took care of Louis, we took care of other people, they always made money. Occasionally we lost money on a couple of deals, but they made their money and they knew that through thick and thin we weren't perfect and things might happen, but we were always going to put their interests first and not try to nickel and dime them. And so that was very rare, by the way, those of you who have money, you know how rare that is to find somebody who you can trust who knows what they're doing, and so when that person finds a person like you as an entrepreneur, they're going to hang on to you, they're going to loan you more money. And so here we are 18 years later, Louis, his granddaughter, other people he knows have all continued loaning us money, and then we have a few other people who do the same thing and it gives us access to money. We take care of that, we're paying his retirement bills, and it's a really good win-win relationship that not many people know when they first get into real estate, they think, go to the bank put 20% down, and that's fine, you can get a 4% interest rate, that's awesome, but here's the time when that doesn't pay off, when you have to go find good deals when money is not as easy to find, you've got to look at alternatives if you really want to stay in the game.

Brad: Yeah, and Chad that's what I wanted to ask, which is, you hear this number, you hear 6% or up to 10% or 12%, with some of these investors, and to your point mortgage rates right now for at least for your first home let's say are 3 1/2 or something, I assume there's a little premium, but I guess what are the pros to going with the investor? Because is it just that you don't have to put 20% down or 25% or whatever it is for investment properties? Are there ways to renegotiate that wouldn't otherwise be available if you had a loan with a bank? Why would someone, I guess, do that at the beginning? And then also for you who, you have a hundred plus units, you have liquidity, if you could get 4% from a bank, is there ever a time where you switch back and think about going with the bank?

Chad: Yeah, it's a really good question because we have thought about going back and we are paying a premium, in a lot of cases, we're paying 6% interest when we could probably go to a commercial bank and get 3 1/2% percent, 4% or we could go to a commercial mortgage lender and get maybe 5% over a 30 year period or something, so we're paying at least a 1% premium in some cases, 2% or 3%. But here's the difference is that 3 1/2% loan that I could get at a commercial bank would be first and foremost a seven-year loan, so at best, maybe a five-year loan, so five to seven years from now, I'm going to have to refinance that loan and pay them back. Not only that, is that lender going to be your partner, are they going to be with you for the long haul. And I always like to quote the story of Dave Ramsey because he's the kind of anti-debt guy and a lot of people know his story. He was a real estate investor in his 20s and he had I think several million dollars in real estate, mostly with commercial loans, with local lenders, and he had a lot of real estate and he had a lot of equity in that real estate but then an economic downturn hit in 1987 and his lender I think was sold to another bank or something. And as I understand it, they called Dave up and said, "Hey Dave, you've got to pay all of your loans back in the next 60 days, read the fine print on page 17, look there, we can call your loans due because of this liquidity clause that we have." And here he was paying his bills on time, never missed a payment and they want him to pay all of his loans. So I heard that story like that, not necessarily Dave's early on in my career and I just became very realist about the way it is borrowing money and that, a bank has a team of attorneys they pay to build this 50-page document that you sign and you sign away every single right, you're personally guaranteeing your loan. And so yes, some cases that's worth it, if you can get a 30 year fixed, 4% loan, which some people can when they're first starting, that's great. But in my case, when I first started, I couldn't do that. And eventually after you get three or four loans, maybe at most 10 loans you're done with the 30-year loans, you can't get them anymore. And so for us, it was just, we never got into that game and we got into the private lending game from the beginning. But what a lot of people find is they get a three or four loans and then they get stuck, that's when you got to start switching, and your decision at that point is, do I get a commercial loan where I have increased risk, where I'm not as... I don't have a relationship with that person over the long run or I'm I willing to just buy a better deal, split it up between me and a private lender, maybe pay a little bit more on interest? But the difference between a 5% and a 6%, yes, that is big over the long run, but I have access to that money. So how many more deals could I buy? How much quicker could I close? I've closed on a deal in four days because I have a private lender, he'll just write me a check. And if you can tell somebody, "Hey, I will close this Friday, it's Monday, I'll close Friday, how much of a discount would you give me?" That's a big deal, and that's hard to do with a bank.

Jonathan: Brad isn't there saying on the A Team, this is predating me a little bit. I think it predates you, but like, "I love it when a plan comes together." And one of the things about an opportunity like this or a time like this is that you don't want to wait until the deal presents itself to know what you're doing, you want to get your plan in place ahead of time? So if real estate's something that's been on your mind, you've been waiting to get started, you may not be able to pull the trigger this week, you may need to start doing some research but Coach Carson is a trusted resource, he's a good friend, I love the content that he's produced over the last five years.

New Speaker: His entire business model is based on trust and integrity, if you listen to how all of his financing is set up, this is a guy that's worked with them for 18 years and says, "I want my granddaughter to invest with you." I trust Coach Carson and I love the content that he produces, and so Coach, if someone wants to deep dive into some of the resources that you've put together and start putting together their own plan for getting started with real estate, how do you recommend that they start?

Chad: Especially for those who are just getting started or kind of get back into it, I made a free course, it takes people through like a seven-day cycle of like, all right, here's step one, here's step two, just down to the very basics. I think that's a great place to start so they can just go to coachcarson.com/freecourse and that'll get them started. And then obviously, there's a lot of stuff to learn out there, there's a lot of details to learn in real estate investing, but I think you're right, that preparing ahead of time, treat it like a business. Long run real estate could be a very passive investment, and it has been for me, I spent a lot less time on my real estate than I do on writing a blog or hanging out with my kids, other things. But in the beginning, it is much more like a business so you treat it like that and go to school, study, learn from people the ChooseFI Real Estate Facebook group is awesome, I'm a member of that, there's lots of discussions there. So just educating yourself is a big deal before you go in and spend some money.

Jonathan: Awesome brother, all right, thanks for joining us on the show, man.

Chad: Yeah, I appreciate it, thanks for having me guys.

Jonathan: All right everyone, I hope we delivered, if we miss something, let us know, but what we really tried to cover is real estate investors through different stages, if you're in it, what do you do, what's the mentality, what's the thought process? And I hope that for real estate investors of all experience levels, this episode brought you significant value. If you're listening to this on your phone, press the subscribe button, lock it in, share this episode with a friend. And for more resources related to financial independence and beyond, go to ChooseFI.com, check out our financial resilience toolkit right there on the homepage. All right, my friends, we'll see you next time as we continue to go down the road less traveled.

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