Justin went from losing $20,000 on his first deal to being a successful, money making investor and podcast host. He turned the page from the first deal by building a great team and getting better at due diligence. Hear what his strategy is now and how he was able to stay positive and move on from his first deal being a loss. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Justin Grimes Real Estate Background:
- Real estate investing turned into his passion in 2016
- Lost $20k on first deal
- Active rehabber, mortgage note creator, and passive commercial RE investor
- Based in Houston, TX
- Say hi to him at https://www.thecashflowhustle.com/
- Best Ever Book: Compound Effect by Darren Hardy
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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, Justin Grimes. How are you doing, Justin?
Justin Grimes: Good, Joe. Thanks a lot. I appreciate you having me on.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about Justin – he is a real estate investor, and it turned into his passion in 2016, but on his first deal he lost $20,000; we’ll talk about that. However, he’s recovered and he’s now an active rehabber, a mortgage note creator and passive commercial real estate investor based in Houston, Texas.
He has a website at TheCashflowHustle.com. It’s also a podcast, you can go check that out. With that being said, Justin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Justin Grimes: You bet. As far as real estate goes, I dabbled in it a little bit by accident perhaps in 2007 or so. I bought a condo, kind of a bachelor pad, and kept that with the intent of just living life there and hanging it; it had a nice view. But as life goes, I met my wife, and things changed, so we wanted to buy a house.
Not knowing what else to do, I just decided to keep that thing and rent it out. That went on for about 4-5 years; it was pretty simple, but it certainly wasn’t spitting off a lot of cashflow, and when something would break, I’d go in the pocket… It never really made a whole lot of business sense. The cashflow would get wiped out every capital expenditure that you’d have.
In 2016, unfortunately, my family lost my father in an auto accident, and from that a lot of things changed. Ultimately, what I was faced with was trying to figure out how to help my mom create passive income in her retirement years. She’s 63 now. So what I knew to do at the time was stocks and bonds; I’ve got a buddy who does stocks and bonds, so let’s put it into the bank… But as those things do what they did, the market has been hot certainly for a while, but what we’d find ourselves doing was worrying about the stability of that, and waking up one morning and all that going down significantly without any of our control.
So what I started doing was looking for investment opportunities, predominantly in the real estate space; she’s in a position where she could invest passively, as an accredited investor, and apartment buildings was the first thing we looked at. We started messing around in that in late ’16, early ’17, and then from there we’ve done some self-storage, we’ve done some mobile home parks all passively, and then I figured “Heck, while I’m at it, why not try my hand at some other real estate things to create some income?”
I took a swing at a flip that, as you’ve mentioned, we’ll talk about… I’ve since pivoted and I do that a little bit differently now.
Joe Fairless: The fix and flip that you did – was that the only fix and flip, and then you got burned and took a different direction?
Justin Grimes: It was, yeah. I took a few months, I did some classes, and a lot of reading, and podcasts… I had a fire under me, “I’m ready to do my first deal!” I jumped in head-first, I guess; not feet first, or with a cushion, or anything. I just jumped on in, and looking back on it, there’s so many things that I do differently now. Tough lessons learned, but lessons learned nonetheless.
Joe Fairless: We won’t harp on it by any means, but it’s clearly gonna be valuable for the listeners to hear about what you messed up on, so that you help other people not mess up on it.
Justin Grimes: Sure. The way we buy deals right now is with some fairly strict criteria; most notably, what we’re looking to purchase our properties at is purchase plus rehab at 70% of the ARV. Those are certainly more difficult to find. And that’s not something I’ve come up with, that’s fairly standard out there… But I didn’t do that on my first deal.
I bought the thing for about 70% of the ARV before I ever put a penny in it, so that put me in a tough position. The total purchase price was right around $220,000, the ARV was around 300k-310k, so it had some room… But when you get into something that size in Houston — that’s a pretty decent size house; it came with some land, it came with 1.1 acres of land when I bought it. And with the repairs, as we opened up walls and found this and that, those expenses multiplied a heck of a lot faster than a thousand square foot house, that is a lot more affordable.
It was an older house, built in the ’50s… Happy to discuss specifics of those lessons learned.
Joe Fairless: Yeah, so it sounds like the repair budget – you came in high, but then the repair budget was the nail in the coffin that you went over.
Justin Grimes: That’s right. That’s where I lost my money. I’m happy to say I was able to pay back any lenders that I borrowed money from and came out of pocket, so I did make good on my debt; however, it certainly hurt.
One of the main things I did not do was just a basic inspection of termites in general. By the time I went to sell this thing, six months and holding cost with hard money – it was eating me up. I go to sell it, the buyer does an inspection, finds active wood-eating termites… So I have to tent the house.
I’m sitting pretty, thinking “Oh man, I’m almost out of this”, and then the next week I’m taking the picture of a tent on the house… That one hurt, additionally… That contract ended up falling through.
The next buyer comes through. It’s kind of a uniquely-zoned property – it’s commercial and residential.
Joe Fairless: In all of Houston, uniquely zoned? [laughs]
Justin Grimes: Yeah, the zoning here is absolutely ridiculous.
Joe Fairless: It’s the Wild Wild West.
Justin Grimes: Yeah, it makes zero sense. Anyway, in the back of this property became a disputed 5,000 square feet of land… And on 1.1 acres of land, that’s about 10% of what I was trying to sell. I did not do a survey at purchase, and that cost me dearly. I basically had to drop the price to who I exited out to just to get the deal off and move on.
Joe Fairless: What was being disputed?
Justin Grimes: There was 5,000 square feet of land in the back of the property that had been sold in 2015. I purchased this in 2017, and the title company that I used to close the purchase did not find the issue. When I went to sell it, that title company did find the issue, and we had to make it right for the new buyer… A lot of talk and back and forth with lawyers, and things like that. Ultimately, I had to take a bath on it.
The lady I bought it from was rather whacky, it seemed, and had some whacky kids, so I had to drop the price $10,000 or so. We’ve got a young family, and $10,000 versus someone crazy knocking on my door because I sued them for 10k just wasn’t worth it… So I decided to just close the book on that one.
Joe Fairless: The first buyer inspection found active termites, so you had to tent the house… And then you did all that and you got another buyer who then the title company during that transaction found the dispute.
Justin Grimes: That’s right, so a couple lessons learned…
Joe Fairless: Dang…
Justin Grimes: Yeah.
Joe Fairless: Emotional rollercoaster, right?
Justin Grimes: Yeah, I still have some hair, but I’ve lost a ton of hair in the past 12-18 months. [laughter] We’ve got a 2-year old and a 3-month old too, so they’re doing their fair share as well. But yeah, some very simple things – getting a termite inspection. Those termites didn’t come just at the end of the project; they were certainly active the whole time, and it would have helped me on the front-end to plan better budget-wise and get some things worked out on the front-end on a further discount…
And then obviously, when the land – it was such a large portion potentially of the sale, of the value of the property, and I didn’t do just a very basic survey on that, which would have cost me a few hundred dollars, it caused a lot of problems… And ultimately, those were the kinds of things that caused me to just blow through the budget.
Joe Fairless: We’ll move on now… What are you focused on now?
Justin Grimes: What we do now — one of the things I didn’t really do before I jumped in was build a trusted team, even of advisors, or business partners, and I’ve taken a swipe at a couple different team members. First of all, I brought on a business partner. During that time, she was active in real estate, a licensed real estate agent, and flipper, Airbnb, things like that.
What I was doing – I’m still working a W-2 job, and have access to different private investors, as well as banking relationships. I’ve got access to some capital that allowed us to get into these deals with lines of credit, and things… And what we do is purchase — just simple numbers, we’ll purchase a property for $50,000 here that needs a rehab, we’ll put 20k into it, and we’ll owner-finance that for $100,000. That’s kind of the basic math of it. And ultimately, what we do is wrap a mortgage note around ours, and a private investor is in the first lien, my partner and I hold the second (our business), and we owner-finance that to a buyer and make a spread on the interest monthly, kind of cashflow… And ultimately, what that does is for me it prevents those capital expenditures from wiping out my cashflow year in and year out when A/C needs to be done, and stuff.
So we go in there, we rehab these, we get them inspected by a licensed state inspector, we offer a good property to the buyer, and then we become the bank. And when my A/C goes does or I’ve got some roof repair at my house, I don’t call my bank… So that’s the position that we try and play in now.
Joe Fairless: You’re buying them with investors?
Justin Grimes: We are. For example, on one of the first deals we did, we raised $70,000 from a private investor.
Joe Fairless: How do you know that person?
Justin Grimes: That is just through real estate networking at events, and things like that. My business partner has a fair amount of private investors that will do these, as well as — ultimately, our target audience for investors is someone like my mom, who’s got a self-directed IRA, some money they wanna put to work, they don’t wanna play in the stock market, and they want something tangible that this risk is tied to… So those are the types of people we work with as first lien business partners on these investments.
We borrowed $70,000 at 9%, and what we’ll do is we’ll structure that at five years interest-only and non-recourse. There’s some gurus in Texas that teach this, so again, this is not my original idea; there’s other people that are doing this, just a disclaimer there. Anyway, so that comes out to $525/month that I owe that person in the first lien. They have a deed of trust, and the first lien on that property.
Then what we did is — that property is worth $100,000 ARV. So I bought it for 50k, I put 20k in it; that’s where my investor’s in. I’m all-in 70k, not using my money though.
Rents in the area – I’m trying to explain how we determine where the market can be for an owner financed buyer… It’s basically capped out for us at rent. We’re targeting people who need some help, they’ve got historical credit issues that they’re working on repairing, or they may be heavy commission-based on their income, and things like that, so a bank isn’t likely to lend to them. For that, we do charge a higher interest rate; however, ultimately their alternative is to pay $1,200 in rent in the market, or to pay $1,200 towards the mortgage note that is amortized and building equity for their family, for the next generation.
So what we focus on is pricing these things, so we’re buying things that are ARV $150,000 and under, because that lets us maintain that cap on the consumer can afford in the area. We’re not afraid to structure longer-term debt; a lot of the note guys will do shorter 15-20 year notes. We’ll do a 30-year mortgage note, and I’ll explain the math on that here in a second… We do 10% down, and that depends on their credit score; the lower the credit score, you’re talking down to 550-650 (that’s the common range of poor credit)… The lower that credit score, the higher the down payment we’ll require. But we’ll structure that — let’s use the example of $10,000 down, so they structure a note for $90,000 at 10,5% interest.
Starting out, their interest — the way an amortization schedule works… I know we’ve got some sophisticated investors as Best Ever listeners, but that thing is very heavily favored in the lender’s side. Traditionally, that’s the way the banks made their money, and it’s one of the secret tools to their success and growth and power.
In this example, the interest paid to me is $788 in that month. The principle in the first month is only $36. As you break it down over the course of five years, they pay $46,000 in interest and $2,800 in principal.
Joe Fairless: Wow. Well, it’s also 10,5% interest rate that you said… That’s incredibly high.
Justin Grimes: It is a big interest rate… So again, what we draw it back to is that could either pay $1,200 in rent and not have anything to show for it in five years, or pay $1,200 in a mortgage payment where they have a chance to build equity and ultimately own an asset.
Joe Fairless: I guess in that example you gave though, how much equity did they build over the first five years?
Justin Grimes: First five years – they still owe $87,000 on a $90,000 note. Obviously, the interest rate is the shiny object in all these scenarios, but for me, I don’t pay more in principle than interest until you’re 17 on my mortgage; that’s a lower percent interest rate, but that’s just the way the banks have it structured. The way that amortization schedule works is until year 17 you’re paying more interest than principle.
Again, at year 10, five years later, they’ve got it down, they’ve paid a total of $90,000 in interest; the balance owed is $82,000, and at this point, my partner and I have cash-flowed that amount; so we’re talking $36,000 and the spread between what I’m borrowing at 9%, and what I’m charging the consumer at 10,5%.
I will say one thing too, that 10,5% is regulated. You can’t charge higher interest rates, and some people do (there are plenty of people that do), but what we do is no more than 6,5 points above prime. When you do that, then it triggers different types of things that the consumer needs to go through as far as education and things like that.
Joe Fairless: The 6,5 is the benchmark? Anything above that triggers a bunch of more paperwork and disclosures?
Justin Grimes: That’s right. How I know that is one of the team members that’s critical for us is a residential mortgage loan originator. To maintain compliance, we’re not licensed (my partner and I) to handle all that paperwork with their personal information and qualification and things like that. This loan originator charges a fee, and on the front-end does all that data gathering and basic collection of information to show that this consumer can, in fact, afford this property based on three years of work history and steady income, and running credit checks and things like that.
After that thing is structured, then we plug in a residential mortgage loan servicer, and again, if the buyer falls behind on payments, I can’t just call them up like a landlord and say “Hey, I need to collect your money here.” There are protections and laws in place for them where that loan servicer needs to step in and follow a sequence of steps. I know you’ve had some of your previous guests on the show who have really walked through and done a nice job on outlining those details.
Joe Fairless: It seems like if you had cheaper private money, then either a) you would have a lower interest rate to the consumer, or b) you keep that same interest rate to the consumer and you’d have a significantly more spread on it.
Justin Grimes: We could. Right now – we’re about 12 months into this, my partner and I, and I think there is probably cheaper private money out there. However, what we know at this point or who we know are usually private money lenders that do house flipping, so what they’re used to is 12% interest and points on the front-end and all kinds of things… So for them this isn’t even attractive at 8%. They’re not our target audience for that.
Ultimately, there’s a lot of meat on the bone on these things when you’re offering that, so our objective is to make a spread on the interest, but not to gouge the consumer. We’re a point and a half above what we’re paying right now, so we’re not doubling our interest rates to anybody or anything, and again, that’s all based off of ultimately what the rent rates in the area will allow the consumer to pay.
Joe Fairless: How did you learn this?
Justin Grimes: A lot of reading, a lot of podcasts, and then a class from one of the gurus here in Texas. His name is Mitch Stephen…
Joe Fairless: Oh yeah. He’s got two books. One of them is 1000 Houses.
Justin Grimes: That’s right. So he’s got a knack for simplifying this, and he does it a little different than we do (a twist on it), but one of the ways that we’re able to do this in Texas – it’s a little different, I think, in other states, and if you’re interested in getting involved in this, it’s worth (as anything else), contacting your lawyer and some real estate professionals, because one of the things that makes Texas attractive is it’s a non-judicial state, so the foreclosure process in the event that you needed to go through it, it doesn’t last half a year. In some states, you have to sue the buyer, wait a year, things like that. In Texas we haven’t had to do this, but our intention would be to rework the note and make it to where a consumer can stay in. If ultimately it can’t work out, then the foreclosure process through the loan service company can wrap up in Texas in 60 days or so… So it’s a much different ball game than 180, and that kind of stuff.
Joe Fairless: What’s your best real estate investing advice ever?
Justin Grimes: From my very first deal, I really think it would have been very simple to just throw my towel in and say “Oh my gosh, this isn’t for me.” I love the stories where people just hit it out of the park on the first one, and they’ve replaced their job income with this new real estate business; it just didn’t work out like that for me.
My advice is to be resourceful and keep moving forward. It’s not always gonna go as you planned, so you have to be able to adjust your course as life and business happens.
Joe Fairless: Absolutely. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Justin Grimes: Absolutely. I was born ready.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:22:15].17] to [00:23:02].25]
Joe Fairless: Best ever book you’ve recently read?
Justin Grimes: It’s The Compound Effect by Darren Hardy. It’s about the power of behavior and mindset, measuring improvement. One of the chapters is called “Elephants don’t bite”. You take one bite at a time and you get through your project or whatever you’re working on.
Joe Fairless: And I’ll also throw in “My life and 1000 Houses” by Mitch Stephen. It’s a very entertaining book, if I remember correctly; it’s been maybe 8 years since I’ve read it, but there’s just so many funny stories about his deals. It’s an entertaining read, I recommend that one too.
Justin Grimes: Yeah, he’s a character.
Joe Fairless: I bet. I haven’t met him in person, but I’ve talked to him on the phone a couple times, way back when I was focused on single-family stuff. Best ever deal you’ve done?
Justin Grimes: What we’re focused on right now on the note business is hitting singles. I tried to hit a home run out of the first deal, or I thought I was gonna hit a home run, and I tripped running at the batter’s box. So we’re focused on hitting singles; those things cash-flow… And nothing crazy, sorry to disappoint.
We do just day in and day out — we’ve done four deals to this point, we’re looking to do four more by the end of the year, and we’re focused on that same criteria of buying and being very disciplined in that approach at this point.
Joe Fairless: What’s a mistake you’ve made on a transaction that we have not talked about?
Justin Grimes: I think that first deal had some other things in it… I’d say releasing funds prior to my inspection. I was traveling for work at the time, and asked a buddy to go by and look before we cut a check. He’s an investor as well, but man, he didn’t look at it nearly like I would have, because when I got back in town there were all kinds of things missing. Lights not working… This was right at the end of the project, so this was kind of some final touches and tweaks, and just detail things; and baseboard caulking, and paint touch-up and things, that I ended up having to pay somebody to touch up, because unfortunately the guy I used was nowhere to be found after he got that money.
Joe Fairless: Best ever way you like to give back?
Justin Grimes: My wife and I like to give back to a couple of basketball programs in the area, and I also hop into the high school once a semester and teach financial literacy to the students there through Junior Achievement, which I know you’ve been involved with as well. I think it’s fascinating that so little is really talked about growing up in school, and even in post-education with college and grad school on financial literacy at the very basic elements. You come out of school not knowing how to balance a checkbook or pay taxes. You’ve gotta learn it.
Joe Fairless: It’s eye-opening whenever I teach a junior achievement class, which is usually like fifth graders… I teach them about what you’ve just mentioned, balancing bank accounts, and teaching them the difference between a credit card and a debit card, and having a monthly budget…
I was recently talking to a niece of mine, and she is a senior in high school, and they were going over that. I was impressed that they were going over it in high school, because usually it’s not the case, but it’s incredible what fifth graders are learning through Junior Achievement in this program, compared to perhaps not a lot of students in general learning about it, and then if they do, then they’re learning about it their senior year in high school. It’s just a skill that’s needed.
Justin Grimes: Yup, absolutely.
Joe Fairless: Best ever way the listeners can get in touch with you?
Justin Grimes: You mentioned it earlier – the website is called thecashflowhustle.com. We’ve got some content on there and then various investment niches that I focus on and bring people on to interview and learn a little bit more about. Then the e-mail is email@example.com.
Joe Fairless: Justin, thanks for being on the show, talking about the lessons learned on your first fix and flip – the termite inspection, and getting a survey done… What a rollercoaster ride. And then what you’re doing now with the lease options, and the way you structure those deals, and how you make money and some of the intricacies about those. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Justin Grimes: Thanks a lot, Joe. Y’all take care.