Mitch has built quite a large real estate investing company, doing at least one deal every four days. His strategy is to seller finance properties that he buys with his private investors. He raises the money and keeps them legal, while his team take care of the rest. He’ll share how he’s been able to grow such a large business, and raise a large amount money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“If the house is worth $100k, I get a loan for about $58k” – Mitch Stephen
Mitch Stephen Real Estate Background:
- Self Employed real estate investor for 20+ years
- Bought and sold over 1500 properties
- Owns over 1,100 storage doors in 16 locations
- Listen to his previous episode: JF95: Boat and Mini Storage Unit Investing…and SOOOO Much More!
- Based in San Antonio, TX
- Say hi to him at https://reinvestorsummit.com/mitch-stephen/
- Best Ever Book: Nothing Down by Robert Allen
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TRANSCRIPTION
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, Mitch Stephen. How are you doing, Mitch?
Mitch Stephen: Doing great, Joe! How are you?
Joe Fairless: I am doing great as well, and welcome back to the show. If you recognize Mitch’s name, that’s probably because you’re a loyal Best Ever listener… And a very loyal listener, because he and I spoke way back in episode #95, and we’re on episode #1,600 right now, so – long, long time ago… Three, four, five years ago, or I don’t know.
Today we’re gonna be talking about how to successfully raise private money. A little bit about Mitch – he is a self-employed real estate investor, he’s been one for 20+ years. He’s bought and sold over 1,500 properties, owns over 1,100 storage doors in 16 locations, and I’ve personally read his book, “My life in 1,000 houses”, and I highly recommend it. Very entertaining book. I read it when I was getting started in real estate, and it opened up my eyes to a lot of things, so I highly recommend his book. Go get that on Amazon.
With that being said, Mitch, do you wanna give the Best Ever listeners a refresher on your background and what your current focus is?
Mitch Stephen: Well, for 22 years I’ve been borrowing other people’s money and then selling my houses with seller financing. In other words, taking a down payment and agreeing to take 30 years’ worth of payments. It’s a way of creating some money today, so that I can live, because I get to keep that down payment money. I usually charge about 10%. My average down payment is 12%. My average down payment is around $12,000, so if you do 2-3 of those a month, you don’t have any problem living… And then my average cashflow – the spread between what I owe my private lenders and what I collect – is around $535. Let’s just call it $500 for easy math.
So I collect 10k-12k down on most of my houses, and then these people in most of my houses owe me 360 months of positive cashflow of $500, which is $180,000 if they still owe me out in the future. And I do that kind of deal about every four days.
Joe Fairless: Well, that’s a lot of volume, and that’s a lot of money coming in, and I imagine it’s a lot of logistics too, so how do you handle that logistically?
Mitch Stephen: Well, first you have to learn how to be a business owner and not an entrepreneur, [laughs] with a glorified job… Which took a while. I had to go to a mastermind and pay my 20k – which ends up being 30k by the time the plane tickets and the rooms are paid for – and you’ve gotta learn from these people that are already at where you wanna be, and you’ve gotta let them unwind you, and you’ve gotta let them wind you back up a different way. You’ve gotta be willing to let that happen. And even more than just willing, you’ve gotta really help them help that happen.
Today I can say that I’ve not seen the last 300 houses I’ve bought, and I’ve not seen the last 300 people that bought my houses. But to do that, I had to learn a lot of new skills. I had to learn how to hire the right people, I had to learn how to hire people and give compensation plans in such a manner that I was not on a hamster wheel. I only have two people in my entire organization that get a regular paycheck. Everybody else gets paid upon success. So that’s one thing. I have about seven people that make this particular planet spin around, and they’ve been with me for a long time, most of them.
Joe Fairless: Let’s talk about those seven people – what are their roles?
Mitch Stephen: Well, one of them is my business partner. We have uniquely different talents. I’m responsible for funding everything, and the infrastructure. I have the office and the administrators and the computers and the softwares and the tracking, and all that; the contract-generating stuff. My partner goes out and he sets up a sales team and an acquisition team and manages that, without having to worry about funding, which is a huge part of the program.
He watches over two acquisition managers and two salespeople, and I watch over the office and the private lenders. I have 14 million dollars in private lenders.
Joe Fairless: So you watch over the office and the private lenders, so you’re money and he’s execution, basically.
Mitch Stephen: Yeah. And I’m also the senior. He’s 32, I’m 58. I’m the one that keeps us out of trouble, because I know where all the trouble spots are in my career. I know what happens in certain situations. So I’m kind of like the advisor, to make sure we don’t get into trouble with anything.
Joe Fairless: Yup.
Mitch Stephen: Shannon is my daughter, she’s the central administrator. She’s the only person with a real paycheck… Although her paycheck is really pretty small for what she does. We like to tie everybody to the success of the company, so instead of giving her a large paycheck like she deserves, we give her a small paycheck and then she participates in every deal in and out, so that the carrots are in the right place for everybody, every morning, when they get up.
She has a personal assistant to help her, and those are the only two people in my office that get a paycheck. I don’t get a paycheck, Mike doesn’t get a paycheck… We all get paid when the deals hit the table. And Mike and I only take $1,250 a piece every time a deal sells. So if we get $12,000 down, I get $1,250 and he gets $1,250; that’s $2,500. The rest stays in the company and is rolling.
Joe Fairless: The trouble spots that you can look for and see ahead, that you’ve seen in your 20+ years of being in the business – what are some examples of those?
Mitch Stephen: There’s too many to even get into.
Joe Fairless: Or maybe some specific ones that you’ve come across recently, that you navigated through?
Mitch Stephen: Well, I don’t make that many mistakes anymore, but that’s probably because I’m experienced… But a lot of it was putting the wrong people in the house, not handling evictions or foreclosures the right way, not getting paperwork just right and now we do… Sometimes you can get running so fast that you start to get sloppy, and that’s a really big no-no… Because you start getting sloppy and sooner or later it’s gonna jump up and bite you. And it might be years down the road.
Also, we had some troubles hiring people, so we finally started testing people, or doing personality tests. The people that the personality tests told me to hire I wouldn’t have picked in a million years, and those are the ones that are still working for me. The ones I picked are long gone.
Joe Fairless: [laughs] What personality tests do you use?
Mitch Stephen: I think we’re using DISC right now, but sometimes you can ask me these questions and I don’t know… I knew the day we made the decision or I told someone to make a decision, but I just don’t remember what it is.
Joe Fairless: Yeah, I get that. Well, let’s talk about the 14 million dollars’ worth of private lenders that you have… How many private lenders comprise of that 14 million dollars?
Mitch Stephen: Not a whole lot. Probably 20-25. I don’t co-mingle funds. Every deal is a one-off deal. If someone has $500,000 they wanna get out, they don’t send me $500,000. I send them a house, “Here’s a house I need 60k on. Here’s a house I need 100k on. Here’s a house I need 40k.” It’s one lender, one borrower, one piece of collateral, and every deal stands on its own. You either get paid, or you get the house. Now, that being said, I’ve never given a house to anybody, and I think I’m approaching about 2,000 in my career now, or 2,000 transactions… But I’ve never given a house back, I’ve never filed for bankruptcy, I’ve never been foreclosed on… By the grace of God, I’ve always kept big enough margins and policed myself good enough that even in the worst of times I’ve never had to give anything back.
I will not let my private lenders in over 65% of what I can sell the house for. And I average 58%. So these are huge margins.
A lot of people – even a lot of the gurus out there – have gone bankrupt, and it all ended up when they overleveraged. They were borrowing 85%-90%, they were cashing out on houses, and then when the economy rolled over and went upside down, they were upside down and they couldn’t sustain it. And of course, the money is long gone. It got spent on boats etc.
The only way it makes any sense at all if you’re overleveraging is if you take everything you cash out with and you go buy an asset with it that makes money. That’s the only it ever makes sense, and I don’t even like that, but it’s the only way you can possibly survive through a down cycle if you’re overleveraging.
I don’t think 65% on a property is overleveraging. I think it’s very conservative. I average 58% leverage, so that means if the house is worth 100k (for easy math), [unintelligible [00:09:32].08] 58k. I give my private lender a first lien position, I send monthly payments, interest-only, five years, non-recourse, collateral only loan, payable monthly.
Joe Fairless: At what rate?
Mitch Stephen: 6% to 8%, and the difference is if I only borrow 50% or less, it’s 6%, because there’s no risk in this deal. Sometimes I borrow 40%. Sometimes I buy houses at extraordinary prices, and when you loan $40,000 on a $100,000 house, the rate of return is relevant to risk and reward, right? Well, there’s hardly any risk in that kind of deal where a house is worth 100k and you’re loaning 40k in a first lien position. So those pay 6%. But the majority of my properties I’m borrowing between 50% and 65%, and those pay 8%.
I could probably fight for a little lesser interest rate, and my lender could fight for a little more interest rate, but at the end of the day 8% seems to be really decent for everybody. It’s not the best for me, but it’s not the worst, and it’s not the best for them, and it’s not the worst… I guess what I’m saying is if either one of us got a better deal, one of us would be shopping all the time. At 8% you just don’t wanna shop. You don’t wanna shop, I don’t wanna shop… It’s good enough.
Joe Fairless: And the 20 to 25 people who are investing with you – how did you come across them?
Mitch Stephen: Well, you know, it’s been 22 years… Mostly what happens is they start off very small, just putting their little thing and running with it. 25k, 30k, 50k loan. Then what really makes a difference is that you make sure that you give them fantastic paperwork, you make sure that it gets filed at the courthouse in a timely fashion, show them where it’s time/date-stamped, so it was actually filed at the courthouse, and where there’s a notary county clerk signature. Then you pay on time. Every time, always, forever. Eventually, they bring you more and more and more.
A lot of the people that I have, I’ve had for going on two decades now. A lot of them don’t need the money, so they just let it roll, and they keep putting it back in. Then when they run out of money, they’re not opposed at all to recommending me anyone they think that might need that kind of 8% return. They recommend me wholeheartedly, and it’s always easier to talk to people when you get a first-hand recommendation from one of your existing clients. That’s how it’s pretty much done.
I have raised a lot of money though from strangers that I never knew before I got introduced to them through some way. Then over a period of time they might start talking about my business, and then when they start talking about my business, it’s funny how it always kind of works around to what I’m paying my investors, and how I’m paying them, and why I’m paying them, and why they loan me money.
Joe Fairless: For someone who has a track record and is looking to evolve their business to bring on more private money lenders, what are some tips that you have for them?
Mitch Stephen: Well, it can work for new people, too. When I’m coaching somebody on how to find the money, the first thing is I have to figure out where their mental block is… Because almost everyone has one when it comes to this subject. If they haven’t raised private money before, they have a mental block somewhere. That mental block might be “I don’t have any experience”, or “I have a bankruptcy. Who’s gonna want to loan me money?” Or “I don’t have good credit. Who’s gonna want to loan me money? I don’t have any experience. Who’s gonna want to loan me money?” “I’m not a very good salesman. How am I gonna talk people into loaning me money?” “I don’t know people with money.” They have all these obstacles.
In fact, my partner, when I met him he was 25, and today he’s 32. But around 26 he started getting private money… But he was getting it from his family or his close relatives. And as soon as that dried up, he stopped being able to get money — or he stopped getting money; he didn’t stop being able to, but he stopped getting it… And I was asking him, “What’s going on here? What’s holding you back? Something’s holding you back”, and I was trying to find out what his mental block was… And I told him to go back and think about it, and tell me what’s holding you back; I’ve gotta know. And he came back, and surprisingly enough, it was one I hadn’t heard… He said “I’m 26 years old. I’m talking to these people that are seniors, in their 60’s and 70’s, and they have these money, and why in the hell would they loan a 24-year-old their money?” He said, “I don’t even own my own home that I live in. I live in an apartment. Why is someone gonna loan me money?”
That’s when I gave him the answer that solves everybody’s answer – “It’s not about you. It has nothing to do with you. Charles Manson should have been able to get these loans. Who cares if killed a bunch of people? It doesn’t matter.” The lender wants to know “If it doesn’t go the way we do in writing, what happens?” “You get that house.” “That one right there?” “Yeah, the one that’s worth 100k.” “And you wanna borrow how much?” “I wanna borrow 58k.” “And you’re gonna give me a first lien.” “Yes sir, I am.” “So if you don’t pay me, I’m gonna get that house?” “Yeah.” “What’s the chances you won’t pay me?” “Not very good. So if you’re thinking you’re gonna get that house, I wouldn’t count on it… But if you do, can you live with it?” And he goes, “Hell yeah, I can live with it. I’d rather you not paying me.” I said, “I know that, but it’s not gonna happen.” “Yeah, I’ll do the loan.”
If someone asks about my credit, I say “You can look at my credit if you want to. You can look at my financials if you want to, but these aren’t here, nor there. You’re either gonna get paid, or you’re gonna get that house.” As a matter of fact, I relieve myself from a bunch of emotional stress by making sure that I look my lenders right in the eye and tell them this before they loan me money – “I’ve got two rights every day of my life when you make this loan. The two rights I have between you and me is one is I can pay you as agreed. Two, I can walk this deed to this house over to your house any day of the week, and that’s one of my viable options that we’re agreeing on… And I can hold my chin high either one of those options I wanna do.”
How I got to that conclusion was I was so conscious of my good name and my good reputation that I never wanted to tarnish it… But if you sign a personal guarantee, you’re signing for all the things that could happen in the world. You’re signing for raging fires in California, and earthquakes in California, and landslides in Colorado, and draught, and lead in water, and if North Korea detonates a dirty bomb in downtown San Antonio and pollutes every house on a ten-mile radius… You’re signing for all that, and that’s not my fault. I don’t have any control over that. So if you’re gonna make 8% with me, you’ve gotta share in part of that risk. And that risk is I have the right to hand you that house any day of the week. Like I said, it’s never happened, not in almost 2,000 houses, but I’m not gonna ruin everything that I’ve ever done for my entire life, all the other assets I have that have nothing to do with this – put all that to risk if there’s some kind of act of terrorism or something and I’m just not willing to risk my life’s work over something that I could never control… So that’s how I got through that, and that’s why they’re non-recourse; that’s why I have huge margins, because I ask for non-recourse. And if you’re gonna ask me for a non-recourse loan or a collateral-only loan, there has to be a really decent margin to protect me.
Joe Fairless: Yeah, that all makes sense. Very logical. When we take a step back – you’ve been in the industry for 20+ years – what is your best real estate investing advice ever for the listeners?
Mitch Stephen: You make your money when you buy. The deal is pretty much decided upfront, 95% of the time. It’s all right there. So make sure you’ve done your homework before you get in. And make sure you can live with the worst-case scenario, whatever that may be… And don’t get in over your head on things. If something’s gonna go bad and it’s gonna crush you, then take on a partner. Make sure that you can carry your weight if things don’t go right.
I guess this is a form of saying “Don’t sign up and borrow a million dollars to close something in 30 days if losing a million dollars i sgonna kill you.” Do you know what I mean?
Joe Fairless: Yeah. Very good advice, that’s for sure.
Mitch Stephen: I do deals today that I wouldn’t have done before, but what’s the most I can lose? You lose 250k. Alright, I don’t think I’m gonna, but if that’s as bad as it is, that ain’t gonna kill me; that ain’t even gonna slow me down. But 10-15 years ago, I wouldn’t have done that deal to save my life, because I wasn’t big enough to handle it.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Mitch Stephen: Alright!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:17:57].21] to [00:18:37].16]
Joe Fairless: Alright, Mitch, what’s the best ever book you’ve read?
Mitch Stephen: Nothing Down, by Robert Allen.
Joe Fairless: Best ever deal you’ve done?
Mitch Stephen: I flipped a car lot once.
Joe Fairless: Why is it the best ever?
Mitch Stephen: Because it made $340,000.
Joe Fairless: What’s a mistake you’ve made on a transaction that you can think of?
Mitch Stephen: I loaned a million dollars on some raw land right before the crash in a gated community, where they had high restrictions, and no one walked on those 15 lots for 2,5 years, and I had to make a $8,000 payment per month. Then I finally sold the first lot after 2,5 years of making an $8,000/month payment. By the way, it was all private money, and my lenders never knew that I had a hard time, but I was stroking a check for $8,000 every month and not even getting a penny from it… And not to mention the taxes and the insurance due every year, too.
Then in 2,5 years the first lot sold, and by the end of four years I’d sold all of the 15 lots. That was my worst deal ever. The lesson was don’t get out of your lane. That wasn’t what I do for a living. I didn’t loan money on raw land for a living, I loaned money on houses, or I bought houses and borrowed money on houses. Those things had the potential to produce an income. Raw land in a gated community with high restrictions has zero chance of making any money.
Joe Fairless: Best ever way you like to give back?
Mitch Stephen: I like to help people learn about money and their finances in real estate, and be able to quit their J.O.B. There’s a guy on TV that does the final scream when people get that free; we ring a bell really loud when people quit their jobs, walk in and tell their boss that they no longer need their boss’ services. I get a kick out of that… I don’t know why, I just do.
Joe Fairless: [laughs] How can the Best Ever listeners learn more about what you’ve got going on?
Mitch Stephen: Just go to 1000houses.com, click on the Free Stuff tab right there. People chastise me all the time for giving away an hour and forty-five minute webinars on how I do owner financing, or give away the first hundred pages of my book, or give away two hours and forty-five minutes of recorded coaching calls, so you can see what it’s like, with all these different people asking all these different real-life questions… So that’s the easiest way, 1000houses.com.
Joe Fairless: Well, Mitch, I enjoyed our conversation, as always, and thank you so much for being on the show, talking about your business model, but then how you implement that business model through the right people, the roles, and how you structure your agreements with your private investors, get paid, or get the house at 65% loan-to-value at most, with an average of less than that… And just your overall approach. You’ve got more than two decades in the business, so it’s important to listen to someone who has that experience, and hear what they’ve learned, and I appreciate you sharing that with us.
I hope you have a best ever day. I really enjoyed our conversation, and we’ll talk to you again soon.
Mitch Stephen: It has been a best ever day, man. Thank you very much!
