March 22, 2018

JF1297: Learning From A Bad First Investment with Drew Eldridge

Drew bought his first deal at almost retail, put too much money in the rehab, and wasn’t getting great returns. He learned from the experience and now owns 20 units and one commercial property. Hear what he learned and applied to his business after having a not-so-good first deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Drew Eldridge Real Estate Background:

  • Real estate investor and has been investing since 2006
  • He has 20 doors and one commercial property
  • Builds his rental portfolio not for cashflow but for retirement
  • Recently helped his son purchase his first rental property at 12 years old
  • Based in Oklahoma City, Oklahoma
  • Say hi to him at 405.213.4041 or
  • Best Ever Book: Never Split the Difference by Chris Voss

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Drew Eldridge. How are you doing, Drew?

Drew Eldridge: Great, Joe. Thanks for having me on today.

Joe Fairless: Well, my pleasure, nice to have you on the show. A little bit about Drew – he has 20 doors and one commercial property. He has been investing since 2006. He built his rental portfolio not for cashflow, but for retirement, and we’re gonna talk about that, to learn a little bit more about what that means. Based in Oklahoma City, Oklahoma. With that being said, Drew, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Drew Eldridge: Absolutely. I am an emergency medicine doctor, Joe, and I graduated from residency in 2005. Around 2006 I was trying to figure out what I wanted to as I started to actually have a little bit of real income. I started doing a little research and looked to see what all the wealthy people seem to do to make and retain that wealth, and it seemed like the commonality was real estate. So I started buying and reading every book I could find, and kind of looked at the variations, and decided that buy and hold was kind of what I thought I needed to get into.

That was 2006 – I bought one property after a few months of doing some research. I knew from reading that I didn’t wanna have the analysis paralysis, so I jumped in there and bought one, which of course was my worst deal to date… But it got the ball rolling.

I bought a few over the next seven years or so. After that I decided I need to look at this more as a business, “How can I increase my efficiency on this?” and kind of went from what I refer to, Joe, as like a hobby real estate investor to actually trying to be serious about it.

Joe Fairless: And what transpired after having that mindset shift?

Drew Eldridge: Well, I basically bought 13 more doors in about 18 months time period. What I did was I just started networking. I said I’ve gotta learn more, and for me to think that I can kind of get this figured out on my own is just silly, so what I started doing was I started reaching out to people that I knew were kind of where I wanted to be, and just trying to figure out what would be the best play.

Through that, I just found more and more deals, and it seems like — I think the phrase is the harder you work, the better your luck is, or something like that… Basically, the more that I was involved in this, it seemed like the more deals came across my desk, and I was just able to start growing. But I also kind of had a mindset shift –  in the beginning I bought these houses more for the equity, like you mentioned in the beginning, more as kind of a retirement play. I’m buddies with Tim Shiner, who’s on your episode 1175.

Tim buys essentially for appreciation, and I kind of had some of that mindset; more than anything, I was buying more for the equity and the long play for retirement, because I didn’t really need the cashflow this minute. But also, some of that paradigm shift that happened about 18 months ago is I moved everything, from 10-year notes to 30-year notes, and actually did start going for kind of a cashflow play… Not because I needed the cashflow, but it just made more sense, because if I wanna pay those notes down quicker, I can absolutely do it. But then it frees up some of my money and I can just use that to build. I’m not tapping into my other income to build my portfolio. So I did have a bit of a mindset shift around that time period.

Joe Fairless: So before it was more for equity, now it’s more for cashflow, and as a result it’s longer-term leverage.

Drew Eldridge: That’s correct.

Joe Fairless: Okay. The first one, you said that was the worst deal to date. What are the numbers on it?

Drew Eldridge: Basically, I had no idea what I was doing. I kind of thought maybe I knew a little bit. I essentially bought at retail. It was probably retail about a 75k house, and I think I got it for 71k. Not much of a discount. Also, in the beginning I thought “You know what, I’m gonna do the repairs myself.” I grew up kind of learning how to do that stuff, and I’m in there fixing holes in the floor, and some other things…

I started with a property manager from that very first house, and I’ll tell you about that mindset in just a second, but she came in and said “Drew, what are you doing? You’re putting up crown molding, you’re fixing this house like it’s a flip or like you’re gonna move into it”, and I’d already spent quite a bit of money on the repairs…

Joe Fairless: How much?

Drew Eldridge: I think I ended up spending about 15k. And the house rented in the beginning for $650. The numbers are horrible, they don’t work out… But it was in an area that I knew was going to continue to grow, and I thought “Okay, I’ll bank off a little bit of the appreciation.” But anyway, looking back on that, it was a horrible deal, but I learned a whole lot from it, and I tried not to make those mistakes going forward.

Joe Fairless: What did it rent for afterwards?

Drew Eldridge: I think now it’s up to $800, but it’s worth probably 115k-120k now. I probably could better use that money elsewhere, but for now I’ve just hung on to it. Also in the beginning I had the mindset that I wanted to be an investor, not a landlord… So I think, unlike a lot of people that I talked to, I started off with that very first property thinking that I wanted a property manager, and that’s worked out pretty well. I now self-manage a couple of the properties, just because this far into it I kind of wanted to learn a little bit more about it… But I think that’s an interesting thing – I talked to a lot of people, and everybody wants to do it all in the beginning, and I think that’s great. My situation, coming out of residency, and not having as much time, having a manager was definitely the right play at that time.

Joe Fairless: You’ve got a commercial property… Is that where your office is located?

Drew Eldridge: No, I’m a partner in a Brazilian jiu-jitsu gym. We started a few years ago, and as we grew our membership and increased our numbers, we went from borrowing a mat to a three-year lease on a building that we had a place, and then about a year ago we were able to buy a commercial property, me and my partner on the gym. That’s kind of my first foray into commercial. Now, the benefit is that I know the tenant, and it’s a single tenant (that’s us). It’s actually been a great property so far, and it cashflows, and we’ve built equity in it, and it’s been a good deal.

Joe Fairless: You are a business partner in the Brazilian jiu-jitsu gym, and then you as a company also purchased a commercial property?

Drew Eldridge: That’s correct.

Joe Fairless: Okay.

Drew Eldridge: And then we rented it to ourselves.

Joe Fairless: Is it at market rent?

Drew Eldridge: It is. We’re able to justify that in cashflow, so it works well.

Joe Fairless: Oh yeah, absolutely. Did you consider buying a property that had two spots – one for you all and then one for someone else, so they could help with that?

Drew Eldridge: You know, we had considered that, but really the reason we did not do that, and I think that’s probably the smarter way to do it if you’re able, but with the business model that myself and the other guy that I’m involved with this – we kind of said “This is the amount that we wanna have as an outlay for this”, and to do that, we needed to stick with just a single tenant-sized building. So that’s how it worked out. It was a 5,000 square foot building, and we needed pretty much all of that for our  own gym. And for us to purchase a building that would have the size needed for any other tenant was just not what we wanted to do at the time.

Joe Fairless: You’ve got 20 doors and one commercial property. We talked about the commercial property… With those 20 doors what’s the largest property size in terms of doors?

Drew Eldridge: Just a three-unit. Most of them are single-families, and then I’ve got one three-unit.

Joe Fairless: Okay. How are you financing them now?

Drew Eldridge: What I had done initially was for those first seven properties that we talked about, because I’d put them on short terms, I built up quite a bit of equity by the time I decided to ramp up the second phase… Essentially, what I did is I went to the banker and we discussed it and I cross-collateralized most of those properties going forward, and I think I purchased probably about 500k retail value for about 5k of my own cash money, and then cross-collateralized the remainder off of those original seven properties.

So rather than having to come up with a large percentage down, that’s how I was able to do it and then grow those with reducing my own personal cash outlay, and increasing that return.

Joe Fairless: I’m starting to sweat a little bit, because I got really nervous when you said you cross-collateralized your properties. So if one property goes down, then it’s a domino effect. How do you think about that from a risk mitigation standpoint?

Drew Eldridge: That’s a very good point. So a couple things here. Number one, going forward, on all these properties – I bought them at a low enough cost that I feel that that’s less of a concern. Because when you look across my portfolio, I’m leveraged at about 50%, even with that. So I think with those numbers that doesn’t concern me as much as it should. Now, if I were considerably more leveraged, then yes, I absolutely don’t think that that’s a smart play. But I think as it stands with where my numbers are, that’s not much of a concern for me at this point.

Also, the other thing is I’m in a little bit different situation than some. I have a decent W-2 income that if I ever got in a real bind, I’m fortunate enough that I can cover some eventualities, at least for the short term. But you’re exactly right, there’s certainly risk involved with that strategy.

Joe Fairless: Do you plan on continuing to buy properties around one to three units, or are you changing your approach?

Drew Eldridge: I would absolutely love to move into multi’s, and that’s kind of on the horizon. For 2018 that’s my plan – I would like to educate myself a little bit better about that and try to figure it out. This three-unit, even though it’s kind of a multi — I mean, it technically is, but it’s not the same as buying a 16 or 20-unit property. That’s kind of my next goal, that’s what I would like to look into and learn and move into.

Joe Fairless: What was the tipping point for you that triggered the epiphany of “I wanna move from a hobby to a business?

Drew Eldridge: I think some of it had to do with just kind of my disappointment with medicine. The thought that ultimately in my job I get paid when I show up, and if I want something else to grow a business, there’s no one that’s gonna come to me and say “Hey Drew, this is what you need to do to grow a passive income.” And I knew from my previous properties that had the potential to do it, and short of me going back to school or starting some other business, that was my best opportunity to build that passive income.

And then the other thing, Joe, is that I’m a physician, so if my kids want to inherit something, a business from me, there’s not one. They could go to school, but I don’t truly have a practice they might inherit. At least with real estate there’s a business that I may continue to grow, that they could be a part of.

In fact, my 12-year-old bought a house last year. I’m trying to teach them and give them something that they can grow into as well.

Joe Fairless: I saw that bullet point in your bio and I was gonna ask you about that. Please elaborate on how your 12-year-old bought a house.

Drew Eldridge: I’ve got three boys: 10, 12 and 15. It’s been about a year and a half ago now, we were taking a trip and I had told my boys, I said “I will pay you $50 to read a book, but I get to choose it”, and my 12-year-old is a big reader. He’s the one that’s a little more on the intellectual side, always loving to read… So he read Rich Dad, Poor Dad for teens. And part of the $50 was we have to have a good conversation about it where you can explain the points, so I had to read the book of course, too.

He started telling me about depreciating assets, and liabilities, and just truly kind of the understanding of what the point he was trying to get across… And the boys had also been going around with us to all these rental properties for the past several years, and they have some money set up in what’s called a drip account; for your Best Ever listeners that may not be familiar, that’s dividend reinvestment plans… Essentially, where you purchase stocks – and you can usually purchase them direct – and they reinvest the quarterly dividends at a discount, so it’s compounding interest and dollar-cost averaging.

[unintelligible [00:15:16].12] that when they were younger, and told family and friends, “Hey, whenever you give gifts of money and things like that, we’re gonna end up putting that in stocks.” So we had done that over the years, and then also I think a $50 contribution monthly just was sucked out of our accounts to make to make it automatic… So Cooper had about $20,000+ that he knew he couldn’t touch until he was 18. But he said, “Hey dad, reading that book and talking about real estate, what if I use that money to buy a house? Could I use it before?” I said, “Well, maybe so. But you’re gonna have to try to figure out all the numbers.” Essentially, “I’m not gonna do it for you” is what I told him.

So we started going out, we’d grab lunch, we’d go make a list of properties, we’d go walk through, we’d drive for dollars, and I would have him make the calls. He would call the realtors, we’d meet them, I’d make the realtors talk to him… They’d try to talk to me and I’m like, “No, it’s Cooper’s money, you talk to him.”

By the end of it, he’s actually talking about foundation… “There’s a crack here. Do you think that’s a foundation problem?” He was trying to estimate repairs, as much as a 12-year-old can… But it was really good. The naysayers – and there’s only been a few, fortunately, whenever I’ve kind of told people about this… But we did have to title it in our names;  after talking with lawyers and the title companies, they said it’s a huge issue to try to put the minors on the LLC or on the contract, so they just said “Title it to him at 18.” And that’s what we did, but we used his money, none of it was from us. He had to pay for the repairs. We checked him out of school to go to the closing.

Even though he wasn’t signing, they had to explain it to him. We use our property manager, but he goes through the statements and looks and sees what the expenses are. Now, he’s always like “Can I have some of that cashflow to buy a dirt bike?” We give him a little bit to make it worth his while, but most of it goes back to basically resupply that dividend reinvestment plan that we started for him, with the hopes that he can do it again in a year or so.

Joe, I think the thing is even if nothing ever comes about it, he’s got a house that he can take some cashflow through college, or sell at some point for a down payment on his own house… But even better, what if he takes to this and wants to start doing some real estate himself?

Joe Fairless: Oh, something already has come about it. That’s incredible. He’s already learning the core principle of Rich Dad, Poor Dad, where if you want a liability, then you buy an asset and have that asset pay for the liability. So you want a dirt bike? Okay, well  your house can pay for your dirt bike, or in Rich Dad Poor Dad terms, your asset can pay for your liability. He’s already starting to see that first-hand. That’s amazing.

Drew Eldridge: 100%. And it’s funny that you said it, because that’s exactly how he justifies things. The amount of cashflow – he’s like “Okay, how many months of cashflow until I can blah-blah-blah?”
My 15-year-old is more social, he doesn’t really care. He’s like “I can’t sit down and read those books and do that.” At some point he may, but as he watches his brother get a little cash, he’s starting to say “Well, maybe I do need to do that. What book was that that I need to read, dad?” So we’re trying to get him involved, and then of course, the ten-year-old is still not quite there on comprehension of all this, but we’ll get there, we’ll see. It’s been fun.

Joe Fairless: What are the numbers on your 12-year-old’s house?

Drew Eldridge: The house that we found for him was a HUD property. When we first looked at or called about it, it was still in owner occupant status. It was funny, because we had kind of just run the numbers on it — because basically he and I would go through the numbers on most anything we looked at, and we had come up with a number and then the realtor called me right after he had gone to bed and said “Hey, this goes to investor status tomorrow. Do you want me to put an offer in?” So I gave it to her and it got accepted.

Basically, we paid 55k for the house, so we had to figure out his down payment… Then we initially had factored in about 3k in repairs, and I think there was an additional 3k because the HVAC needed to be replaced. So the retail value – of course, for what that’s worth – is about 85k for that house, and he’s renting it for $800/month. I think he’s all-in out of his own cash 17k-18k or so, and he’s renting it for $800/month. But the total acquisition cost I think was 62k or so.

Joe Fairless: When you take a look at the generational wealth component and you see what you’re building and what your family is building, how do you protect that from an asset protection standpoint? What do you have in place, or what will you have in place?

Drew Eldridge: Honestly, Joe, that’s one of the things that I think is very important, and probably something that I’m a little lackadaisical about… This is in an LLC, but I really don’t have a whole lot beyond that. Now, I’ve got some umbrella insurance policies as well, but there’s really not much beyond that. As I’ve started to network and meet people like Tim Shiner and meet local real estate investors here in Oklahoma City, I’m taking little tidbits from each of them, and that’s one of the things that on my list of “I probably need to improve.”

Just like I always tell people that I talk to about real estate, I’m like “Network, network, network”, I went and had lunch with a guy as I kind of started to try to ramp this up, and he looked at me and said “Well, show me your numbers.” I did, and he said “Why is your insurance number so high?” Essentially, he told me I need to switch to a commercial policy and save me about 7k/year.

By the same token, when networking this is one of the things that commonly comes up – “How are you protecting your assets?” I hate to admit it, but that’s something that I probably need to be a little bit more on the [unintelligible [00:21:11].02]

Joe Fairless: Based on your experience as an investor, what is your best real estate investing advice ever?

Drew Eldridge: My best real estate investing advice ever is essentially to network and to do something. I always say, do something and do it now. That doesn’t mean necessarily to buy a house right now, but do something to move you towards that goal. I’m not sure if that’s going out and buying a book, buying a journal to start taking notes in, but do something and do it now. Because I see too many people that say “Hey, I wanna invest in real estate”, but they don’t network, they don’t bother to take it beyond just talk.

Joe Fairless: Absolutely. It reminds me of the phrase that Tony Robbins says, “When would now be a good time?” It scrambles your brain a little bit, it’s like “Wait, what? When would NOW be a good time?” Okay, I get it. Thank you. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Drew Eldridge: Let’s do it.

Joe Fairless: First though, a quick word from our Best Ever partners.

Break: [00:22:11].03] to [00:22:39].23]

Joe Fairless: Okay, best ever book you’ve read?

Drew Eldridge: Never Split the Difference, by Chris Voss. It’s a book about negotiation, it’s something that I have to constantly go back and look at. Just this past week it saved me $16,000 on an RV purchase. I highly recommend that book.

Joe Fairless: I interviewed Chris about 10-15 episodes ago, I think… That’s when it released, but if you just google “Chris Voss Joe Fairless”, that interview will come up. Best ever deal you’ve done that wasn’t your first and wasn’t your last?

Drew Eldridge: It was, again, by virtue of starting to take this serious and tell people that I’m a real estate investor… At the hospital, there was a nurse that came to me and said “I want to rent my house that I have left over from my divorce.” I said “Here’s how you do it”, and she came back to me about six months later and said “Will you just buy this house?” I said, “Okay, tell me the numbers.” It values at about 70k, and she said “I owe 38k on it. Will you go ahead and just pay off the mortgage and you can have it?” I know those numbers aren’t super sweet for probably a lot of your best ever listeners…

Joe Fairless: Yeah, they are. That’s incredible.

Drew Eldridge: Well, for me it was a great deal… And here’s the other thing too, and this just goes to show you the power of that networking. So that was a year and a half ago… About two weeks ago her mom (of all people) contacted me and said “Hey, are you still buying houses?” “Sure.” She said “I have a friend whose mom died; she’s got this house, she just can’t bear to deal with it.” I said to her, “Okay, tell me the numbers.” She wants 85k for it, can I go and talk to her?

I got it for 82k, and I probably should have paid 85k (I hope she doesn’t listen to this), but because of Chris Voss’ book, you’ve gotta make them feel like you didn’t just accept their offer, because of the psychology of them thinking they could have done something different. But the house is probably worth 150k, and I will probably have to put 5k or less into it. And I did tell her “Your house is worth more”, but she was crying and thanking me at the end of it for helping her get this quickly done. Then that deal led to a second deal, and those two have been some of the best deals so far.

Joe Fairless: How did Chris’ book help you save $16,000 on that RV purchase?

Drew Eldridge: I really didn’t intend to buy an RV, and I was having the one that I currently have worked on… And by the way, I love to travel in the RV with a family; it’s a motorhome, it’s a great way — it’s 100% a depreciating asset, but it has emotional importance and I think it’s one of the few depreciating assets I’m cool with. But anyway, I went in and on Monday I sat down with them and said “Here’s the one I’m interested in on your lot”, and the price that they gave me – we kind of negotiated a little bit back and forth, and I kind of just was like “Nope, thanks” and walked out. Because they told me “This is our bottom dollar, we’re not gonna budge” (we came down a couple thousand).

So the guy calls me back two days later – of course you knew that was gonna happen… And I said “Okay, well let’s talk”, but what I did is I pulled out Chris’ book (it had been a few months since I read it) and I took some notes, and I said “You know what, I’m gonna just try.” So we went back and forth, and I used a lot — I used his “Now, how am I possibly gonna be able to do that?”

Joe Fairless: Yup.

Drew Eldridge: And a lot of his other little techniques, and it was great. Ultimately, I walked out 16k or 17k cheaper than what they told me was their absolute best number on Monday, take it or leave it. I owe Chris some money, apparently.

Joe Fairless: I have his e-mail, so I will e-mail him and copy you and I will tell him that you’re paying him $8,000 at least. Don’t worry, I’m on that.

Drew Eldridge: Absolutely. Or at least buy him a beer or a lunch.

Joe Fairless: I think he’ll probably take the $8,000 over the beer or lunch.

Drew Eldridge: I bet.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Drew Eldridge: I kind of alluded to it before… I think number one was paying retail or too close to retail on that first deal. And some of that was also just because I was anxious to get something done, and get the first one under contract. I think that’s probably the biggest mistake. Then also included in that deal was the fact of trying to overdo it and not make it a rental, whenever that’s really what the market I was going for.

Joe Fairless: Best ever way you like to give back?

Drew Eldridge: I’m a reserve deputy with the County Sheriff’s office here, and been doing that for ten years; I’m assigned to the SWAT team, and I do it for free. In a way, it’s my version of community service… So I guess that’s one way that I give back.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on or get in touch with you and say hi?

Drew Eldridge: I’ll give you my phone number, they’re more than welcome to text me. It’s 405-213-4041. I love to talk real estate, and I always seem to learn something from everybody I interact with. Also, we’re gonna try — I’ve got a cousin… I grew up kind of just outside of Memphis, Tennessee, and we’re gonna start doing some wholesaling in Memphis, so is our little basic investor website, if anybody wants to reach out to me there as well, or is interested in the Memphis market, hit me up for that. We’re gonna give that a go in 2018.

Joe Fairless: I am surprised that URL was still available,

Drew Eldridge: No one was more surprised than I was.

Joe Fairless: I’ll put that in the show notes link. Thank you so much, Drew, for being on the show, for talking about how you are — boy, you’re involved in a lot of stuff. Volunteer reserve deputy, Brazilian jiu-jitsu gym partner, commercial owner (although you’ve got a really good tenant, since it’s you and your business partner) and then a doctor, too. I probably ended with the most time-consuming thing… Emergency medicine doctor.
Thank you for being on the show and talking about how your 12-year-old bought the house and the approach that you too with him… Certainly a lot of lessons for all the parents or people who want to be parents, an option for how to approach with your kids. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Drew Eldridge: Thanks for having me on, I appreciate it.

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