June 17, 2019

JF1747: Air Force Captain Builds His Real Estate Portfolio For A Side Hustle with Payton Pearson

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Typically for a side hustle, people will Uber or work part time somewhere. Payton is taking another route and building his real estate portfolio on the side of his full time job. He’s just getting started with real estate, currently with three properties, with very lofty goals. Hear what his plan is to accomplish his big goals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“To get good loans at good rates, you have to prove to your lenders that you can pay it back” – Payton Pearson


Payton Pearson Real Estate Background:

  • Research analyst, and former Air Force Pilot
  • 1000+ hours of flying experience, owns 3 properties, in process of acquiring 4th
  • Based in Dayton, Ohio
  • Say hi to him at terr547ATyahoo.com
  • Best Ever Book: Rich Dad Poor Dad


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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Payton Pearson. How are you doing, Payton?

Payton Pearson: I’m doing great, how are you?

Joe Fairless: I am doing great as well, and welcome to the show. Payton is in the Air Force, he’s a research analyst, he’s a former Air Force pilot; thank you, sir, for what you are currently doing and have done for our country. He’s got 1,000+ hours of flying experience. He owns three properties, he’s in the process of acquiring his fourth. Currently based in Dayton, Ohio. With that being said, Payton, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Payton Pearson: Sure. Hello, everybody. As you said, in the military, I’m currently a captain. I’ve been in for about seven years. I went to the Air Force Academy prior… I got my degree in electrical engineering, and then went to become a pilot and decided to come on over here, in Dayton, Ohio, working at Wright-Patterson Air Force Base. I’m also going to [unintelligible [00:01:53].11]

I hopped into real estate back in about 2017, just a little bit ago. I bought my first property, which is the property at which I am living… And really started to figure things out, like — I was looking around at the rental properties that were comparable to the one that I had just bought, and realized “Wow. The mortgage is significantly lower than what they’re renting out the properties for.” And the mortgage was very low for me to begin with, so I was thinking to myself “Well, shoot, this might actually be very profitable.”

My family, especially my father, has been really wanting to jump into real estate for quite some time. It’s kind of the hereditary thing, if you wanna say that, but… Either way, I got in just a couple years ago, and I have a whole business proposal that I developed as a result… And considering my life goals, I have a very, very aggressive growth model set up for myself, which involves something to the effect of buying at least two apartment complexes per year for the next 5-10 years, and then upping the ante a little bit to much bigger properties. So I’ve got an outlook of very aggressive growth, and I’m really just getting started now, but the momentum is going.

Joe Fairless: I think you mentioned you had a business proposal with your father, or you created one… If I heard you correctly, will you elaborate on that and what you did?

Payton Pearson: Oh yeah, so a business model/proposal is what you wanna do if you’re gonna get really serious into whatever venture you decide to go into. If you’re really inspired, it’s gonna just kind of happen naturally, which it did with me. Basically, I wrote up a plan; I literally wrote it up in Microsoft Word, just explaining what my process was going to be, what the tiers would be. I was gonna start off just to get my feet wet and figure out how real estate works, and how to make it profitable, figure out numbers like returns on investment, net operating income, cashflow positive, the cashflow quadrant, and stuff like that, and get a feel of the things that I needed to know prior to doing really, really big things, like buying 100-unit apartment complexes.

That’s what I started up writing in the plan. Basically, the tiered system that I developed was something to the effect of starting off with 4-unit apartment complexes, and then after I’ve gotten at least 40 units, which would be in that case 10 properties, I would then scale to around 32-unit apartment complexes. But of course, this can be kind of an exponential growth model rather than just a staggered growth model, because I’ll be making more income as I buy more properties. And then eventually go into the 32+ unit apartment complexes, then the 100+ unit apartment complexes maybe in 20 years or so, and then once I get really big, get to my ultimate goal… And this is a very goal! [laughter] [unintelligible [00:04:53].21] but you’ve gotta shoot really high if you wanna get really high.

The goal is to build hotels on the Moon eventually, and by about the time that I’m in my forties to even in my fifties is probably gonna be about when humanity is actually establishing a sustainable, permanent presence on the moon, and I wanna partake in that. So it doesn’t have to all be scientific ventures and whatnot.

So yeah, in this plan I developed that procedure, I developed the general plan, so in words what I wanna do, and then step-by-step procedure what I’m gonna do to execute that goal. I also put in the business proposal specific types of properties that were good examples of what I was planning on buying and what I was planning on doing with them. I also put a sample statement of work in the finished business proposal, where I show exactly what I would do to the properties that I would be buying… Because eventually, the purpose of this is to beautify the world.

I don’t just wanna buy properties to make money, I wanna make the world a better place for people who live it, so that frankly – and this might be kind of a dark way of putting it, but I’m just gonna be frank, and I’m gonna be blunt with it… I wanna make the world a less tragic place for people to live in, and the way you do that is you make it more beautiful. And the way you make it more beautiful is you improve the things that you have control over. And the way you improve the things you have control over is you must first have control over them. The way you have control of a real estate is you buy it. Once I have control over the real estate, then I can start making it better, and then I can rent it out to people and make their lives better because they’re living somewhere that doesn’t suck the life out of them.

So I put in that statement of work in the business proposal, and I had actually sent it out to a couple other entrepreneurs just to see what they thought, see if they wanted to work with me… And I also developed an executive summary. I put that all together, put in some sources, and now if anybody wants to see what I’m doing… Oh, my financials are also in the business proposal as well. That’s something that you wanna have to present to get good loans, at good rates. You’ve gotta prove to them that you’re gonna be able to pay it back, type of thing.

But I think I’m probably preaching to the choir to a lot of people, but to all those people who are listening to this podcast who are new, there you go.

Joe Fairless: Did you create that process or that proposal for someone in particular?

Payton Pearson: It was so that I would have it for my own personal reference, but also for my real estate agents that I work with pretty exclusively, as well as my loan officer that I work with pretty exclusively. This is basically to prove to them that I’m not just talking the talk; I actually wanna walk the walk. That I know what I’m talking about and I’m actually gonna execute.

Joe Fairless: In true electrical engineer fashion, you created that process… And I would love to have been in the room when the loan officer was reading through it, and you go through everything, you go through the terminology, you go through the types of properties you’re buying, how you’re underwriting them… And then he sees that you wanna build on the Moon. [laughter] I’m sure he’d be like “Payton, I was with you all the way up to this point, but… Seriously? You’re building on the Moon? Come on…”

Payton Pearson: Well, that’s literally the Moon  shot. [laughs]

Joe Fairless: Well, I love it. You’re the first person I’ve interviewed who has the vision of building hotels on the Moon, so props to you for that. Let’s talk about the three deals you have done. You said you live in one of them, so you’re house-hacking one of them… What about the other two? Tell us the purchase price and the business plan.

Payton Pearson: Absolutely. The first four-unit apartment complex that I purchased was just a nice little four-unit apartment complex in this place called Kettering, Ohio, which is a decent, little suburb. It has some nice school, it’s pretty clean… And I bought it for 143k. That’s the great thing about the Dayton area, at least if you’re gonna buy in a decent part of the Dayton area, because you don’t wanna buy anywhere. You’ve gotta make sure that you’re buying somewhere that you can handle.

So yeah, 143k was the purchase price, and I structured that deal with my parents, actually. They lent me some money, and they get a rental dividend every month, that I pay them. So I pay the mortgage down, I take my share, I pay off all the electrical, and the gas, and the sewage, and the garbage and everything else, and they get their $315/month, and I get my Porsche. So that was the first four-unit apartment complex I bought.

Joe Fairless: How much did they lend you?

Payton Pearson: They lent me $15,000. Just at the critical point where it might not be worthwhile to lend the money; you might just wanna try to raise it yourself and wait a little longer… But it worked out.

Joe Fairless: And how much are they receiving a month?

Payton Pearson: $315/month. They’re going to get all their money back in just about three years.

Joe Fairless: Yeah, that’s good.

Payton Pearson: Yeah.

Joe Fairless: You hooked them up.

Payton Pearson: I did, I did. And basically, the way you make it work – and I know that you know this, but for the audience – the way you give good incentive to the people who are gonna give you money to buy properties is you just offer that you’re gonna pay them a dividend every month, and they give you money so that you can do the down payment, pay for all the bills, pay for all the mortgage and everything else, and take care of the tenants. That way, they get their X number of dollars per month, and then you’re taking care of everything else. You might get a little bit more, but you also have to pay for the mortgage and all the other stuff. That way, their hands are clean and you’ll be able to keep on getting money from these people, and it won’t be a big deal.

Ultimately, my parents wanna do this same type of process with me for about 6-10 properties, which will come to anywhere from $1,800 to $3,000 that they’re gonna be making per month, once they’re done with it. That’s the structure of the first one. I put in about $20,000 for the down payment, they put in the other 15k.

Joe Fairless: Okay. And why did you borrow the 15k? Was it because you didn’t have the 15k, or you didn’t wanna put that in, so you needed to bring on a partner?

Payton Pearson: Yeah, so I had other things where my money was invested, and I didn’t wanna take it out at that time, because those other things are also growing, and they have potential to grow very aggressively… So I wanna leave them where they are.

Joe Fairless: Like what?

Payton Pearson: Well, I have a little bit in 401K, a little bit in a Roth IRA… Those things are not particularly aggressive growth, but nevertheless, I have some in there. I have some in a Robin Hood account, and I have a significant amount in cryptocurrency. That – I’m just gonna let that stay there. I could take it out at any time, it’s completely liquid, but I’m not gonna take it out, because I want that to keep growing.

So I can save with my current job — I also do some part-time jobs on the side, so that I can acquire even more money for down payments, but I can save anywhere from $50,000 to $80,000 a year if I’m really lean with my expenses, which I work hard to be lean. And then at that point, I had about $20,000 that I was willing to put in… And I asked my parents to partake in this with me. I showed them the business model, I showed them the plan, and they told me what they wanted to do, and that’s what we’re gonna do. Right now I have another $10,000 loan that they gave me for the other property that I’ve just bought, and I’m gonna pay them back just straight cash, plus 1k. So that’s not gonna be one where they’re gonna be invested in it with me; I’m just gonna pay them straight back.

Joe Fairless: Let’s talk about that other one. What are the numbers on that other one?

Payton Pearson: The other property I bought was in this place called Oakwood, Ohio, which is the nicest municipality in the greater Dayton area. It’s where there are million-dollar properties and whatnot. But I got a property, a four-unit apartment complex, for $129,900.

Joe Fairless: Wow.

Payton Pearson: Yeah. It was an incredibly good deal. When it was all said and done, the property was appraised (when we were closing) for $179,000. So that was an instant $50,000 to my equity. Plus the $32,000 that I put in the down payment, means that I have $82,000 of equity instantly in the property. So ultimately what I’m gonna do with that is I’m gonna of course let the loan mature a little bit, because it has two, and then in about six months I’m probably gonna take out a home equity line of credit on it, so that I can use that money towards another down payment, for another property. And also for some improvements to the property itself.

The previous owner of it – she’s a nice, old lady, a real estate agent, but she really didn’t take the best care of the property. The property is in decent shape; it’s what you would call “a sound, but ugly property”. It’s got good water heaters, it’s got good HVAC etc. but it’s just dirty, and the carpets need to be replaced, and there’s one or two cracked windows, and the paint needs to be repainted, and stuff like that.

I actually just got one of the units renovated, and it looks sharp. I found a really good contractor that did it for very cheap, and he does really high-quality work. He was recommended to me by my real estate agent [unintelligible [00:14:06].29] who also actually happens to be top 50 in the greater Dayton area. She’s a very good real estate agent, so I basically hit the jackpot with her. So that worked out.

Joe Fairless: How do you do a home equity line of credit on an investment property? Well, I know how you do it, but do you have a lender that will do that? Have you already figured that out?

Payton Pearson: Oh, absolutely. This is something that we definitely wanna talk about, don’t we? Okay, so a home equity line of credit (HELOC), what that is is you’re taking a line of credit out on the selling value of your property. So what happens is a bank will come in and appraise your property. You have to pay for the appraisal, so you need to keep that in mind. But they go in and they appraise your property, and they say it’s worth X number of dollars. In my case, it was $179,000 that the property appraised for. And then, typically they’ll give you anywhere between a 70% to an 85% loan-to-value HELOC.

If my property is $179,000 appraised value, then they might give me $179,000 x 0.8. Currently, I have a mortgage that’s about 97k. If I get the property appraised for 179k, and they’re gonna give me an 80% loan-to-value, or 80% value for the HELOC – I might be messing up my terms here; correct me if I’m wrong – they’ll give you 80% of the value of your property, so it’d be $179,000 which is the appraised value, times 0.8. You can do a calculation on that; it’s something like $150,000-ish… And that value is the value on which you’re taking the HELOC.

I don’t know all the details of it, because I still haven’t done it yet, but HELOCs – one of the great things about it is that they’re simple interest. So they’re not amortized, like your mortgage. They’re simple. If you go to a bank and they say they’re gonna give you a  HELOC for $30,000 and then they say it’s at 6%, then that’s just 6% interest on a 360-day year. It ends up being something like — say you had a line of credit of $10,000. That’d be like $50/day that you’d have to pay back. I haven’t done that yet.

Joe Fairless: But have you confirmed with a lender that they will do that on an investment property?

Payton Pearson: I’ve talked to my loan officer, but we haven’t actually gone through the process. It’s still gonna be a while.

Joe Fairless: Alright. Got it.

Payton Pearson: The loan has to mature first, so…

Joe Fairless: Alright, so there might be some challenges there, but maybe you’ll resolve it. So let’s talk about the four-unit… You bought it for $129,000. What are the rents?

Payton Pearson: The bottom units – one is going for $575; that’s the renovated one. And the one that I’m gonna rent out here soon is gonna be $525. And the two upper units are $450 and $460. Those are way below market right now. The market rents for apartments of similar type and size in that area are right around $575 to $650. They’re way below market rates, and that’s because the previous owner rented them out for way below market rates.

Joe Fairless: Okay. So right now it’s bringing in around $2,010, and you can increase that an additional couple hundred bucks?

Payton Pearson: Well, if I get all the units rented out for $600, that would be $2,400/month.

Joe Fairless: Do you have to do anything to get it move-in ready?

Payton Pearson: No, not really. The downstairs unit that I just renovated was basically the extent of what I had to do.

Joe Fairless: So right now it’s 1.5% on the rent ratio, dividing the rent by the purchase price… That’s solid. And then if you’re able to increase it from $2,010 to $2,400, that’s gonna be 1.8%. That’s a nice cash-flowing deal, and in a  nice area, too. How did you find both of those four-units?

Payton Pearson: The first one I purchased, the real estate agent with whom I work I found through my running group. I’m a distance runner; I run marathons, and stuff like that… And I’ve found her because she’s also a runner, and I basically told her my story and what it is that I was seeking to do. I told her the type of properties that I was looking for… And this was about the November timeframe of 2018. And she said “Yeah, I can help you.”

We decided to go out on one weekend and look at four separate four-unit apartment complexes in the Kettering area. Three of them were pretty horrendous, and then the one that we ended up settling on was just head and shoulders above the other three. The previous owner had bought it for $90,000 – it was a short sale – and he had renovated all four units. He took very good care of the property. He had fixed some of the cracks in the foundation, he had replaced the water heater… He had done a lot of work with it and he made a humungous profit off of it because he bought it for 90k and sold it for 133k. But we did that, and that’s how I found the first one. That’s why I’m continuing to work with my real estate agent. She’s very good.

Joe Fairless: So the first one was that agent, the second one was that agent, too. Right?

Payton Pearson: Yeah.

Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Payton Pearson: What it comes down to, the number one thing, period, end of story, is not just location, but you have to run the numbers. You must, you must, you must, you must run the numbers. If it is now cashflow-positive, then you really strongly wanna consider not buying that property. Now, if you can afford paying more than you’re making off of the property for an extended period of time, then maybe you can consider purchasing it. But that is a very, very strong caution.

Real estate is very forgiving. Inflation rates of properties over the course of several years are pretty consistent at right around 2%-3%, sometimes higher if you’re in Hollywood or something like that, sometimes lower… But they’re pretty consistent nevertheless. Rental rates also go up by about 2% per year. So real estate is very forgiving, but you must, you must, you MUST run the numbers and have them down solid in your mind. You need a net operating income that is positive… At least eventually.

Joe Fairless: Yeah, that’s an important component.

Payton Pearson: It’s the number one thing, because in order to make a business profitable, and therefore solvent and actually last, you have to make money. That’s what it comes down to. Don’t be afraid of tenant screening. If you buy a property that is severely under-rented, it’s probably being rented to fairly poor people. I’m not just talking economically, I’m talking about quality people, poor quality people.

This is not me trying to be mean or anything, but you’ve gotta be realistic. There are people that are gonna damage your property and whatnot, and you can’t work with them; don’t be afraid to find a way to kindly get them to leave, because you’re trying to improve the properties and make the business profitable. It has to be profitable, otherwise you can’t do anything with it.

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

Payton Pearson: Yeah, sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:21:51].26] to [00:22:35].15]

Joe Fairless: Best ever book you’ve recently read?

Payton Pearson: That’s a tough one, I’ve read several… I’m just gonna go with the classic here, Rich Dad, Poor Dad.

Joe Fairless: If you had to start over with no capital, what would you do?

Payton Pearson: What year are we talking here?

Joe Fairless: Right now.

Payton Pearson: Okay, alright. Wow… I would probably look deeper and research more of how to raise funds with private lenders.

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

Payton Pearson: The property that I am currently living in. It’s a single-family home. It is in a blue-collar neighborhood. I bought it for higher than I probably should have, and I’m probably not gonna be able to sell it for a profit.

Joe Fairless: Best ever deal you’ve done?

Payton Pearson: That would be the Oakwood property that I’ve bought for $50,000 below appraisal.

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

Payton Pearson: With the profits that I make from my real estate work, as well as my job, I give 10% back to my church, and as we were talking about earlier, build up the properties that I own, and increase people’s wonder and set a positive example for everyone else to follow, of not giving up, working your butt off, and achieving anything that you set your mind to.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Payton Pearson: You can find me on BiggerPockets.com. My name is Payton Pearson, and I’ve got quite a bit of information on there now.

Joe Fairless: Well, Payton, thank you for being on the show, talking about the way you intentionally set up your business very thoughtfully, putting together that business plan, and your vision for where you’re headed… And how you were able to find the deals through relationships, groups that you’re in, and then also the numbers on the deals, and how you navigated some of the tricky parts of those. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Payton Pearson: Thank you! Thanks for having me.

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