April 24, 2018

JF1330: BRRRR 101: Real Life Example Of Scaling Using This Famous Method Of Investing with Joe Cornwell

Joe is a police officer in the Cincinnati, Ohio area. He’s also a very savvy investor and agent who has tackled three deals in his short time being an investor, with plans and goals to do more and more. Today Joe gives us details of his first BRRRR deal, a duplex that he renovated, rented, and refinanced. He was able to use that equity created and use it to buy a 6 unit, which is the beauty of doing BRRRR deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Joe Cornwell Real Estate Background:

  • Police officer for 6 years, currently at the City of Deer Park
  • Realtor for 2 years, did a live in flip in 2012-2015, own two rentals 8 total units using the BRRRR method
  • Plan to start own brokerage and property management company in next 8 years
  • Wants to do 20 units in 8 years
  • Based in Cincinnati, Ohio
  • Say hi to him at jcornwell@realtyonestop.com
  • Best Ever Book: Best Real Estate Investing Advice Ever

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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, Joe Cornwell. How are you doing, Joe?

Joe Cornwell: Good, how are you?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Joe – he’s been a police officer for six years; he currently lives in a suburb of Cincinnati, Ohio. He’s a realtor for two years, he’s done a live and flip, and he did that from 2012 to 2015. He also owns two rentals, a total of eight units, using the BRRRR method.

He plans to start his own brokerage and continue to grow and grow and grow. With that being said, Joe, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joe Cornwell: Absolutely. As you said, I’m a buy and hold investor, so my goal is to grow to at least 20 units that I hold personally. I got into real estate with the live and flip; that’s kind of what opened my eyes to the potential of real estate. Prior to that I wasn’t exactly sure what I was gonna do investing-wise for retirement, and when I started building real estate units for retirement savings, I kind of realized that this could be more of a wealth-building tool than just a retirement type saving, so that’s what initially piqued my interest into it.

Joe Fairless: With that live and flip, were you married at the time?

Joe Cornwell: I was not.

Joe Fairless: You were not. So a single guy… A peek behind the curtain, Best Ever listeners – I’ve known Joe for about three years or so. The first thing I did when I moved to Cincinnati was I started a meetup, and Joe has been one of the loyal attendees who comes every month for the last three years, so we’ve gotten to know each other fairly well. So I will attempt to ask questions that I would ask if I didn’t know you.

So you were single at the time, with the live and flip. What were the numbers on the flip? Because I know that was the foundation that kind of served for you to build and build from where you were at then to now.

Joe Cornwell: Right, that was definitely the catalyst that opened my eyes to real estate being a wealth building tool. So I purchased a home in Milford, as you said, a suburb of Cincinnati, and my initial purchase I think was 87k, which was a pretty good deal even back in 2012 when the market was still pretty down… And I’ve put about $7,500 in materials into the house, and I did most of the work myself, which was kind of a learning experience in and of itself, doing the rehab. I was fortunate to have a stepfather with a ton of rehab experience, but he’s of an age where he can’t really do the work, but he was still there to kind of coach me through the process. And through that, I was able to sell it in 2015 for 125k, and I think when I walked away it was around a $40,000 profit. Obviously, I got my down payment back, and then it was pretty close to 40k in profit as well.

Joe Fairless: So you got the profit from that deal, and then what did you do?

Joe Cornwell: I actually used that to purchase my current personal home, which was about three and a half times more expensive, and I was able to put a much more substantial down payment, which would not have been possible without that first live and flip, and I probably wouldn’t have been able to afford my home at the time without those funds being made from the flip.

Joe Fairless: How much did you put in initially? You said $7,500 into materials at that first purchase. How much was your down payment?

Joe Cornwell: I think on that one — I might have done 15%. I think the total was like 13k, so I guess all-in I was 20k into it.

Joe Fairless: About 20k all-in, okay. So 20k all-in into the first deal, you made 40k on it, and then you rolled that into your personal home. Robert Kiyosaki would slap you on the wrist for that… And then what?

Joe Cornwell: At that time this was not intentional. It wasn’t some planned out thing; I did not buy that first home with any sort of metrics in mind. I really didn’t know anything about real estate investing; I kind of just happened upon it, and I realized — upon the selling is what really piqued my interest. So this is 2015, probably — actually, pretty close to when I met you, and I really piqued my interest into learning more about real estate. At that time I had no idea what I wanted to do. Obviously, I was a police officer, as you’d mentioned; I’d been doing that for about three years at that time. The income was good, I enjoyed my career in law enforcement, but I realized “Hey, there’s a lot of potential here in real estate if I can figure out what I’m doing, and make this not only a retirement tool, but a wealth-building tool as well.”

Joe Fairless: So the money was put into the personal home, and we don’t see it anymore, correct? Or do you leverage it in some way?

Joe Cornwell: Yeah, it’s in the home.

Joe Fairless: It’s in the home, okay. So that’s gone. So then what?

Joe Cornwell: So as I started attending your meetups – as you mentioned, this was I guess maybe fall of 2015 or so – I really began learning everything I could about real estate. I started absorbing every book I could get my hands-on, online resources, podcasts such as yours, and doing everything I could to really learn about real estate, which kind of led me to going down the process of buy and hold.

I kind of knew that flipping and wholesaling was more of a job, and even though those were extremely interesting to me and still could be in the future business plan, it was more of a job and not an investment to me. So the buy and hold strategy was really what piqued my interest in what I wanted to pursue.

Joe Fairless: What was the next purchase?

Joe Cornwell: So the first actual rental purchase was a duplex in the City of Deer Park, which is where I’m a police officer… So it was kind of part of the plan there, to be somewhere I’m physically at most of the time for my first purchase; I wanted to be very hands on, I wanted to keep a good eye on my tenants. Obviously, one of my biggest fears prior to investing was “How hard is landlording really gonna be? Are my tenants gonna trash the place?”, that kind of thing. So being there physically, and obviously, being a police officer gave me a little bit of a competitive advantage to managing tenants.

Joe Fairless: What are the numbers?

Joe Cornwell: The initial purchase on the duplex was at $89,000, which was a pretty good deal even in that market at the time. The comps were like 140k+ on any duplex sold in the school district for Deer Park… So I put 25% down, so that was $22,250 down; I ended up putting a total of 38k into the rehab, so it was a very substantial rehab. This house was about 90 years old when I bought it…

Joe Fairless: 38k you say?

Joe Cornwell: 14k in materials and 24k in labor. It was a total of 38k in renovations, which was basically a rebuild on the interior for both units.

Joe Fairless: Okay. You said it was a good deal based on comps. What about the post-renovation rents?

Joe Cornwell: After it was renovated, I was able to get a total of $1,500/month, which was $850 for the downstairs, which is a 2-bedroom, and then $650 for the upstairs, which is a one-bedroom apartment.

Joe Fairless: Okay. What were they renting for before the renovations?

Joe Cornwell: I believe he was getting $500 on the upstairs; I’m honestly astonished that the previous owner was able to get $500/month because it was in complete disrepair. Half the plumbing didn’t work, the bathroom wasn’t really usable… It was honestly in horrible condition, so the fact that he was able to get any rent was pretty surprising, but I think it was just an extremely long-term tenant that didn’t really complain much and was happy to just have a place to live.

Downstairs I believe was a family member, so I don’t think he was even collecting rent on the downstairs.

Joe Fairless: Okay. And $1,500, you’re all-in at 127k, so that is a 1.1%. You nailed the 1% rule, but not 1,5% or 2%, so it doesn’t sound like it was a killer deal. It sounds like it was a really solid deal. Is that accurate?

Joe Cornwell: Yeah. It worked for the rehab; obviously, the cash-on-cash was very low… I think it was at like 13%, which is under my metric of what I would want, but for the all-in, the rent ratio was also low. However, when I was able to go for the refi, I was able to pull all of the capital from the renovations back, plus a little bit more of the down payment as well. The strategy was to do the BRRRR method, and I knew going in that it was going to be a big renovation job.

Joe Fairless: Oh, there’s the key. So I heard you correctly, you were able to pull back out the $23,000 down payment AND the $38,000 out of pocket costs?

Joe Cornwell: Not all of it. I was able to get back 41k, and that included the closing costs for the refinance… So 41k total cash back, and I was all in on the renovation for 38k, so let’s say 19k is what I still have into it.

Joe Fairless: Yeah, you got back 67%. From all-in money, you got back 67% of what you put in initially. And the property cash-flows?

Joe Cornwell: Yes, I’m still cash-flowing with the new loan at about $400/month. That’s on a 20-year amortization [unintelligible [00:09:46].07] short-term loan, and my cash-on-cash went up to 22%, which I was very happy with… So that’s above my goal, which was 20%.

Joe Fairless: The 38k and the 23k – did that just come from the piggybank from your W-2 job?

Joe Cornwell: Right, so a little bit of savings from my W-2, and one of the reasons why I ended up getting my real estate license that you mentioned before was not only to learn more the business from the inside, but predominantly so I could take my commissions… I don’t need that money to live on, to pay my bills, because obviously, I do have another full-time job. However, I wanted to accelerate my savings by having the commissions coming from another income source, so that’s why I pursued the real estate license.

So not only am I able to help other clients who are doing the same things that I’m doing, but I’m able to make extra income to accelerate my buy and hold strategy.

Joe Fairless: Then you’ve got the money back out – what did you say it was?

Joe Cornwell: 41k was what I cleared after–

Joe Fairless: 40k is what you cleared. You put in 61k in total and you got 41k back, so you’re into the property for 20k. You’ve got a cash-flowing property, and… Now what do you do?

Joe Cornwell: I took that refinance, and I knew roughly what I was gonna have back as far as the cash-out, and I started looking for another property. I was able to find a six-family property which is also just outside of Cincinnati, and in a good neighborhood. I was able to take that 41k that I got from the cash-out, with another 10k in savings from the real estate commissions, and put that down on a six-family, which has obviously increased my cashflow substantially, in addition to the $400 that I’m getting on the duplex.

Joe Fairless: And what are the numbers on the six-family?

Joe Cornwell: As it were purchased, currently – and I actually just closed on this last week…

Joe Fairless: Congrats, by the way.

Joe Cornwell: At purchase, the rents are $3,050. That’s five units at $500 and one unit at $550. My plan for the property – and what I’m already implementing – is to get all of the total rents to $600 each, which would be $3,600/month, plus coin laundry, which is roughly $75 to $100/month. That is the plan, and it should take about 12 months.

This actually has the potential to be another BRRRR strategy, because at purchase, which was at 246k, I’m actually going to be able to increase the valuation, because it’s a commercial property [unintelligible [00:12:25].27] and the cap rate, which is roughly 8% for the area, to actually bring the market value of that property up to 315k.

Joe Fairless: How long’s that plan projected to take?

Joe Cornwell: I think within 12 months I will have the rents the way they should be, at market, and that includes renovating three of the six apartments, so within 12 months I would have that at its highest current value.

Joe Fairless: And how did you select the management partner to help you with this business plan?

Joe Cornwell: Well, I’m actually managing it myself.

Joe Fairless: You’re self-managing?

Joe Cornwell: Yes.

Joe Fairless: Okay. Why are you self-managing versus a third-party?

Joe Cornwell: Well, there’s a few reasons. One, I only have eight units, so it’s manageable to manage, it’s not overwhelming at this point, even though I do have a couple careers. So that’s one.

Two, I wanted to learn to business from the inside, and I think part of learning the business is being hands-on, especially at the beginning, and leasing the tenants, doing the screening, dealing with issues as they come up, dealing with contractors – all those things that property managers do, and I think it’s important to learn that from the inside.

Now, the third reason, and specifically in my situation – I want to eventually build a property management company as part of the brokerage, and offer those services as well as brokering sales and purchases of real estate… So obviously having that experience, having units and having to manage them under my belt is gonna go a long way in building the property management company in the future.

Joe Fairless: How did you find the six-unit?

Joe Cornwell: It was actually just an MLS deal that had been on market for a little while. I had somewhat of an existing relationship with the agent and was able to talk to him at the price they listed, which was at 275k; they didn’t have a lot of interest, they hadn’t done any price drops, so I think it kind of went under the radar for a little while. Luckily, I was able to go in and negotiate and get it down to 246k, so I was very happy with that purchase price.

Joe Fairless: How did you arrive from 275k to 246k? How did that back and forth go?

Joe Cornwell: Well, the initial thing – again, because this is a commercial property, I was able to kind of demonstrate to the agent and to the seller that the rents hadn’t really been raised since he’d owned it, which was eight years. He had raised them a little bit at a time, but it wasn’t nearly where it should have been for market rents, so I was able to show them that this property is really only around a 230k-240k range, that’s the market value on it. I explained to them, “If you guys wanna renovate it and bring the rents up to market, then it may be worth close to what you’re asking for or even more, but if you’re not willing to do that, then you’re probably gonna have to lower the asking price to sell it at its current value.”

Luckily, they were able to understand that, I was able to demonstrate that, and honestly it was the truth, so… Luckily, we were able to come to an agreement after that conversation.

Joe Fairless: What is your best real estate investing advice ever?

Joe Cornwell: I would say that the number one lesson I’ve learned, and looking back at the past two years that I’ve been educating myself in real estate is that you really cannot learn this business – whether that’s flipping, buy and hold, or wholesaling – unless you actually get into it and do it. I think that’s the most important thing.

I work with a lot of first-time investor clients and I have this conversation with most of them – you can learn everything you wanna learn, you can listen to every podcast, you can read every book, but until you get in and do your first deal, the opportunity cost you waste by having fear and not taking action and making decisions is gonna cost you more in the long run than even a bad or mediocre deal for your first executed deal.

Joe Fairless: 100% agree. If you were given the opportunity to approach anything that you’ve done differently, what would you do differently?

Joe Cornwell: It would definitely be my first contractor experience and relationship that would have been completely different.

Joe Fairless: What happened?

Joe Cornwell: Long story short, I basically paid a contractor about $3,000 for work that was not completed, or was completed incorrectly and had to be redone. I did have a contract with him, and they did not hold up to their end of the contract and I kind of learned the painful lesson that it was gonna cost me more in legal fees and time than I would be able to recuperate, even if I won, a civil litigation. So I learned the hard way to never pay a contractor for work that’s not completed or not completed correctly.

Joe Fairless: What checks and balances would you have in place in the future?

Joe Cornwell: I do things a little bit differently now. One, I found better contractors; I think that’s the easiest and probably most important aspect of this. I found contractors that I trust and that are reliable.

Joe Fairless: How do you screen for that trust and reliability?

Joe Cornwell: Well, the second group of contractors I was fortunate to find were actually referrals from one of my tenants who he previously worked for their company, so it’s a mix of right place, right time, but also to tell everybody you interact with what you need, because if people don’t know what you’re looking for in any aspect of your business, you’re not going to have people that are able to find those things. So just by talking to my tenants and explaining to them what I needed, they were actually luckily able to connect me with almost the perfect fit to the puzzle piece, so to speak.

But as far as me personally, what I do differently is I inspect all the work myself prior to releasing funds, and I make sure it’s done correctly. If I don’t know enough about what it is that they did, which luckily now with the experience I’ve gained, I pretty much do… But if I didn’t understand what should be done correctly, I would bring in somebody else that I do trust (or a third-party) to inspect work, again, prior to releasing those funds for things that aren’t done or not done correctly.

Joe Fairless: That’s where you bring in your stepdad, the heavy-hitter, it sounds like…

Joe Cornwell: Yeah [unintelligible [00:18:13].10] even inspection companies to come out and inspect work, so… There’s a lot of resources, even if you don’t have that advantage.

Joe Fairless: On a related note, on my very first house that I purchased for $76,000, which is actually the same amount that you put into your first one, we got the inspection report – I didn’t know what the heck I was looking at, so I immediately emailed it to my dad and my brother in law, and then they gave me their thoughts, so… We might not have the right skillset, but we just have to be resourceful to find others who care about us and our financial well-being to help us out.

Joe Cornwell: Exactly, and especially when you’re brand new. Obviously, let’s say five years total of being involved with real estate, the amount of information I’ve learned – and I tell people this a lot – I feel like I could have gotten my PhD in real estate, because I’ve spent more time studying real estate than I ever did in college, because it’s something I’m passionate about and it means more to me honestly than college classwork did, so… I feel like you don’t have to do this for 30 years to learn a lot about this business. If you put the time and the effort in, you can learn a lot in a quick amount of time.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Cornwell: Let’s do it!

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

Break: [00:19:24].10] to [00:20:06].15]

Joe Fairless: Best ever book you’ve read?

Joe Cornwell: I would definitely say — can I give more than one?

Joe Fairless: Yeah, sure.

Joe Cornwell: Well, I enjoyed both volumes of your book, those were great.

Joe Fairless: Oh, you don’t have to say that, come on… [laughs]

Joe Cornwell: They were really good, they gave me great perspective from a lot of different aspects of real estate. I enjoyed the Bigger Pockets books, I’ve read all of those, and then obviously the Kiyosaki books are really good as well. That involves a few lines of books, but those are all great things for new investors.

Joe Fairless: Best ever deal you’ve done?

Joe Cornwell: I would say this second purchase here, this six-family is gonna be the best deal. It’s already on track to do really well, and the cashflow is gonna be a huge step in my long-term goals.

Joe Fairless: What’s the business plan with that in terms of getting your money back out? If there is one.

Joe Cornwell: I’m considering, depending on where I’m at in 12 months, doing another BRRRR with this building, because obviously there’s gonna be around 40k+ there in equity that I could potentially tap into, while leaving 20%-25% into the building. But it also depends on my personal finances, obviously, if I’m able to save enough for the next good deal that I come across; I may not need access to those funds right away, so it’s really gonna be deal-dependent at that point.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Joe Cornwell: Aside from the contractor issue on the duplex that I already mentioned, I would say the biggest mistake I made was underestimating the renovations. What I mean by that is on the duplex I had estimated about 25k in a worst-case scenario, and I quickly learned that when you start tearing walls off and basically gutting a building, especially a 90-year-old building, there is substantial risk for other issues. I found knob-and-tube wiring, I found additional structural damage from termites, and obviously electrical and structural costs added up very quickly, which ended up being almost $15,000 over my initial budget.

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

Joe Cornwell: I really enjoy giving back to the police and fire community. One of the aspects of my business is offering as discounted real estate services as I’m allowed to, and I think that police and fire and those tight-knit communities have a hard time trusting other people; obviously, there’s a lot of reasons for that, but having a real estate professional that they can trust and is also going to give them the best financial break they can is one of the aspects of my business that I enjoy doing.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Joe Cornwell: I would say the best way is to email me. My current e-mail is jcornwell@sibcycline.com, and if you need any real estate services in the Cincinnati market, I’d be happy to help.

Joe Fairless: Sweet. Well, Joe, thank you for being on the show and catching up with us and talking to us about how you got started and grown from the live and flip to now eight units, and recently including that six-unit property… And then the numbers. I love getting into the details of the numbers and how you approach each transaction, and as we’re going through it, it’s clear that it’s just building and building and building, and there’s not a lot of additional out-of-pocket cash that’s coming into these deals; there’s some, but there’s not a lot, and the rewards are certainly disproportionately larger relative to the amount of additional cash that’s being put into each of these deals.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Joe Cornwell: I appreciate it, thank you.

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