David Ounanian Real Estate Background:
- Founder of Transform St. Louis, LLC
- Full-time investor and agent
- 3 years of real estate experience; 7 years as an agent
- Portfolio consists of 12 properties using the BRRRR method and flipping 3-4 properties a year
- Based in St. Louis, MO
- Say hi to him at: https://www.transformstlouis.com/
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Best Ever Tweet:
“If you’re not investing in real estate, then you’re probably not hanging around people who are investing in real estate.” – David Ounanian
TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. 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, David Ounanian. How are you doing David?
David Ounanian: What’s up, Joe? Thanks for having me. Long-time listener, first-time caller.
Joe Fairless: Well, awesome. Well, I’m looking forward to our conversation and you know the drill then, you know how we approach these conversations.
David Ounanian: Yeah, yeah. I’m excited to dive into it.
Joe Fairless: A little bit about David – he’s the founder of Transform St. Louis LLC, he’s a full-time investor and agent, he’s got three years of real estate investing experience and seven years as an agent. His portfolio consists of 12 properties using the BRRRR method, and flipping three to four properties a year. Based in St. Louis. So with that being said, David, do you want to give the Best Ever listeners a little bit more about your background and your current focus?
David Ounanian: Sure, Joe. So like so many of us, I was raised in a middle-class family and told that I needed to go to college and get a job working for somebody else. So that’s what I did. I got my degree in Computer Science and became a software engineer at a big corporate company, started climbing the corporate ladder there, spent about ten years before I realized I was miserable, and the scariest part of that was I didn’t know why. I had a great job, where I could work from home and I was making six figures a year, beautiful family, new vehicles, new house, lake house, boat, everything you could ever imagine, but I wasn’t happy, and I had to do some soul searching to find out that I was actually caught up in the rat race and I didn’t even know it. So I had financed everything. So every time I got a raise, we went out and bought something nicer for our family… And before you knew it, at the end of my career there. The paycheck would come in on one day and the very next day, all of the direct deposit that I got from my corporate job was gone to pay all these bills, and it was absolutely a miserable feeling that I was going to have to stay in my job for the next 30 years before I could retire and do something that I wanted to enjoy doing.
Joe Fairless: What was the epiphany that took place?
David Ounanian: So I had got my real estate license on the side back in 2013 because I had a miserable experience with buying my first home to live in. I had to learn how to become the agent myself; my realtor was so bad. So then when I started hearing about family and friends buying and selling their houses, I was like, “Well, I might as well get my license to help them on the side.” So that was part of it, but I had my real estate license or four years before I decided to become an investor… And most of that time, I didn’t know I had all these false beliefs about investing; it had never even crossed my mind of the possibility that I could invest in real estate, especially now that I was licensed and now in the industry. The one thing that came to mind was — one of my good friends from college approached me and he wanted to buy his first investment property, and it was this little $35,000 single-family home near the airport here in St. Louis, and I told him he was out of his mind. I told him he was crazy. You’re going to lose money, you’re going to get called to fix the toilet in the middle of the night, and it’s going to be absolutely miserable. I don’t know what you’re doing. And here I am years later thinking, “I was worried about trying to figure out how to fix a toilet, but at my corporate job, I’m debugging thousands of lines of computer code and fixing all these problems.” It’s like that problem seems a lot easier to solve, but I wasn’t in the right frame years and years ago. But I saw him execute this deal. He did the BRRRR method to a T. He put about $5,000 to $7,000 into this property, it appraised for $75,000.
Joe Fairless: $75,000?
David Ounanian: Yeah, this was a grand slam in the terms of a BRRRR deal, and he pulled out a 75% loan to value refinance, so he got all of his money back plus some, and then he had this thing rented. It was a three-bedroom house, he had three girls going to the University here in [unintelligible [00:06:26].24] move into the property, and they wanted to pay the rent six months in advance. So he hears from them twice a year, he gets $1,000 a month, and I think his mortgage payment on that $50,000 loan is something like $250 or $300 a month. I saw that happen, I was like, “Holy cow. I got to get out and do this myself, because this is the way out.”
Joe Fairless: Wow. That is a textbook case study of the BRRRR method. So you had your full-time job as a software engineer and you kept getting the raises, but then the income kept going out the door because of the direct deposits. What was the conversation like with your family members whenever you’re like, “Okay, now I want to pursue real estate”? Was there pushback, and if so, how do you navigate that?
David Ounanian: Oh my gosh, yes. So you’ve got to understand that if you’re not investing in real estate, you’re probably not hanging around anyone that invest in real estate either. So that was a completely foreign topic.
Joe Fairless: That’s an interesting observation. Yeah, yeah it’s true.
David Ounanian: So it’s a completely foreign topic to anybody in my family. None of my friends except for the one friend that I told you about. So everybody that I tell about all these– it took me about, I want to say, eight or nine months before that epiphany happened, and then I bought my first deal. And during this time, I’m telling everybody about my plan. “Oh, I’m gonna start investing in real estate,” and not one person was saying that’s a good idea. They said, “You’re crazy,” just like I told my friend when he bought his first deal.
Joe Fairless: You were just repeating the party line that you’ve been told many times.
David Ounanian: Yep.
Joe Fairless: Okay. Were you married at the time?
David Ounanian: Yeah.
Joe Fairless: Okay, so how did you have that conversation with your significant other?
David Ounanian: That was just by repetition. So during these eight or nine months where I’m gearing up to buy my first investment deal, I am just going crazy with listening to podcasts, I mean, hundreds and hundreds of podcasts were listened to; your show, Bigger Pockets, any other show you could possibly think of. I’m reading all these books because I heard on all the podcasts the investors are saying that Rich Dad Poor Dad was the inspiration; literally, 99% of everybody said that book, and I wasn’t even a reader at the time. I hadn’t read a book since I had been required to in college, and I was like, “Well, I better get this book because everybody said they read it.” And I read that book and then what that did for me was just got me addicted to reading, and so I started reading books and consuming audible books about this and just trying to learn investing, learn personal growth, all that stuff over these eight or nine months… And what happened was every night, I would come home from work and I would spill all this new stuff that I learned about to my significant other, and of course, eight or nine months of this goes by and she’s like, “Will you just go ahead and buy your first investment deal?”
Joe Fairless: You just bored her down. [laughter]
David Ounanian: That’s how it happened.
Joe Fairless: When you look at the deals that you’ve done, your portfolio consists of 12 properties within a three-year span. How do you do 12 properties using the BRRRR method within three years?
David Ounanian: Really, this was done very easily. So I had a full-time job that was at least 40 hours a week. I’ve got young children at home, so there’s not a whole lot of extra time. What was beneficial to me is that I had the ability to work from home, so I could swivel the chair from one laptop to another to do something on the real estate side… And usually when you’re acquiring a rental property, the stuff that you have to do is 5-minute tasks. Unless you’re the one over there rehabbing it and stuff like that, you can outsource pretty much everything and just be the manager of the investment. So it really wasn’t that large of a time commitment to acquire that many units in the time that I did.
Joe Fairless: So let’s talk specifics for some deals. What was your first one?
David Ounanian: First one was the only one I lost money on; it was an absolute nightmare. So you listen to all the podcasts, you read all the books and you know enough to be dangerous. Let’s say that. So I went into this deal. It was a property that I found on Craigslist from a wholesaler. It’s a single-family home here in St. Louis, and the wholesaler was telling me that it was a $20,000 rehab to make it rent-ready. So this was going to be my first deal. I was going to do the BRRRR method. All the numbers checked out. I went to the house. Never had estimated a rehab before, but I read some books, I looked up some stuff online. I thought I knew enough. So I went in and I said, “You know what, I think that’s a little low. I think I’m gonna go with $25,000.”
Joe Fairless: Okay. Yeah, you want to cushion it. You want to be super conservative.
David Ounanian: Yeah. So over the next six months, this deal became an absolute nightmare. I ended up putting close to $50,000 into the property. I made the mistake of using all of my own cash to finance this deal. My spouse and I had a savings account with ten years worth of savings in it, and literally, every dollar was into this property, and I remember at the end of this time that we held the property it was like, if anything else goes wrong, I don’t know how we’re going to pay for it; it was getting really scary. Luckily, we were able to get it sold, take a small loss on it and get most of our capital back, but it was one of those things where you, in the moment, you’re like, “What the heck is going on? Why did I do this? How did this happen?” But then looking back on it, I got my Ph.D. in rehabbing a property, because I learned every single thing that could possibly go wrong on this property. So it was well worth the education, I guess.
Joe Fairless: And it’s certainly well worth you sharing that story, because anyone listening doesn’t have to go over their budget, $25,000 or so because you’re telling the story. So I appreciate that. What specifically in the budget was not accurate that you initially projected?
David Ounanian: So one of the big problems with this house was all the utilities were off and it was vacant, and it had been vacant for years; I want to say at least two or three years. So I had the property inspected by a home inspector, and I’ve used this particular home inspector dozens and dozens of times as an agent. He’s awesome, he usually covers everything, but one thing that I didn’t put together was because the utilities were off, there was no water, electric… He really couldn’t test a whole lot of stuff. So when we got all the utilities turned on after closing on this property, all of the plumbing was shot. Every single pipe had to be replaced. Even the sewer lateral underneath the foundation of the house, we had to go end to end, dig up the entire foundation, replace the sewer lateral; that’s an $8,000, $9,000, $10,000 job there. The bathrooms weren’t to code, so that added more expense. None of the outlets were to code, the wiring was off. We needed new electric panels, raised a service wire. He got on the roof… Luckily, we were able to save the roof, but then when somebody was purchasing it, they had an inspection and their inspector said that the roof needed all these repairs, so we ended up putting a couple of thousand dollars into the roof as well.
One of the other big ones was the foundation. So they had a finished basement with paneling in the basement. Little did I know that the foundation behind it was crashing into the house. So that was a big surprise, and I remember the day I was at the property when we figured this out, because my contractor was down there. I think there’s some pipe behind the paneling that they had to get to. So I wouldn’t have never known about this unless they had to get to this particular pipe. So we took down the paneling, and the whole wall was just leaning in and had all these cracks in it… And I decided to call a foundation contractor out to estimate it, and the first guy that got there said it was going to cost $15,000 to fix, and I literally broke down and cried when he left. It was the low point of this rehab, and I’m sitting there in my house and I call my one buddy that bought that first property, and I’m telling him what happened, and he’s like, “Just get two more bids, Dave, get two more bids” and I was like, “Okay.” So I get the next bid, and the next bid is $10,000 to fix the wall.
Joe Fairless: Get five more bids [unintelligible [00:15:18].05].
David Ounanian: Yeah, keep getting them.
Joe Fairless: Eventually, they’ll pay you.
David Ounanian: Yeah. So long story short, the third bid came back at $6,000 and we signed off and gave a warranty to the buyer, and so it was perfect. So I was able to stomach that number a little bit better.
Joe Fairless: Oh, man. Some of the things you mentioned, I totally get. It was vacant, so utilities were off. So when you turn them on, all hell broke loose, and some of the stuff. I’m wondering from your initial inspection– and I get it, this is your first deal, so there’s a Ph.D. as you mentioned, but as far as wiring and it not being to code – and this is where I need to be educated – were you not able to tell, or not you, but your inspector, not able to tell that it wasn’t to code without having the utilities on?
David Ounanian: I think one of the things he was able to tell us was the service wire was too low. So that was one, but what we didn’t know is when we turned on the panel, all of the outlets were not grounded properly. So now we had to pull electrical permits to swap out all the outlets, and I think we put two-prong outlets on there to make sure– so that we didn’t have to run the ground wires to them.
Joe Fairless: Okay, got it. So that was your first deal; the only deal you lost money on. Did I hear that correctly?
David Ounanian: Yes.
Joe Fairless: How much did you lose?
David Ounanian: It was $5,000 or $6,000.
Joe Fairless: $5,000 or $6,000, but yet you did it again.
David Ounanian: Yeah.
Joe Fairless: Or you did another deal, I should say.
David Ounanian: Right, yeah.
Joe Fairless: What was the conversation like with people who are closest to you, after you told them – if you did tell them – that you lost money on this first one but, “You know what? I’m doing it again.”
David Ounanian: You know what? It’s interesting, because before we were actually done with this first deal, we went under contract with the next property, and that one was a home run. Much like–
Joe Fairless: Thank goodness.
David Ounanian: –the example that I gave you from my friend of mine… I really wasn’t public about this back then, because almost–
Joe Fairless: What about your wife, when you talked to her, and you’re like, “Yeah, we just lost money, but you know what? I’m gonna go and put this other property in the contract because I want to double down on this strategy”?
David Ounanian: Yeah. Now, it was a different animal because I really give credit to listening to shows like yours because you hear time after time, investors say that you’ve got to be persistent and you’ve got to learn from failure and fail forward. So even going into this first deal, I had that mindset, and there was a bigger why that was powering us, that one deal, no matter how much I lost on it, was not going to stop me from being successful at this and getting out of my corporate job… Because that was the ultimate goal for this.
Joe Fairless: Okay. So the second deal, quickly, what are the numbers on it? You said it was a home run.
David Ounanian: Yeah. So this was a $60,000 property that we put about $5,000 in to make rent ready; it appraised for $99,000, and then rented for $1,050 a month.
Joe Fairless: Wow. Yeah, and you still have that property?
David Ounanian: Yes.
Joe Fairless: I know when I introduced you, I said – because it was in your bio that you flipped three or four properties a year, so how do you determine which ones you’re going to flip and which ones you’re going to hold?
David Ounanian: Sure, sure. So real quick, what’s nice is when you learn how to rehab a property once, it’s fairly easy to do it over and over again. So after learning on that first deal that was a complete nightmare, now at least we knew how to rehab a property successfully, what could go wrong and what’s going to go into it. But to get to your question here, when you’re looking for these rental deals, a lot of times, the property is too expensive to cash-flow as a rental. So if you’re talking like a nicer area like an A or B neighborhood, sometimes it’s not going to cashflow very well as a rental property, just because the property values are too high. But as you come across these, if you know how to rehab houses, now they can be fix and flips for you, and so that’s where we don’t let anything fall through the cracks just because we can’t add it as a rental; let’s see if we can make this work as a flip.
Joe Fairless: Besides the first deal, what’s been the most challenging property?
David Ounanian: The most challenging property. Man, besides the first one, I guess it was another property that I bought that was sight unseen. I bought this one off the MLS. It was listed for $37,000, it was a Section 8 tenant paying $708 a month, I believe, and it was under lease for a year. I think it was a new one-year lease at the time that I bought it. So picked it up and it was like “Easily, I think this property could appraise for higher.” We got it appraised at the six-month mark, because that’s when you can finance using a conventional loan that isn’t going to go off a new appraisal. So I do the new appraisal… I did nothing to this house, but maybe a little bit of landscaping and paint on the outside, some curb appeal, and it appraised for, I think, $59,000. And so instantly I had some equity in it.
The problem that became is when that lease came up– so the lease came up, the tenant decided to vacate the property at that time, and now I’m into the property… And I had been in there once or twice after going under contract, but I knew it was in a little rougher shape, but it wasn’t to the point where I was going to back out and lose my rapport with this agent that I was working with… And we got into the property after she got out, and it was another foundation problem downstairs. It had — the foundation walls were returning to dirt. They were deteriorating, and so we had to do some pretty extensive foundation work on that property. But that all said, the deal still cash-flowed. So it’s still a win and we still have equity in it.
Joe Fairless: How much was the foundation work?
David Ounanian: That was $10,000.
Joe Fairless: Why did you buy it sight unseen?
David Ounanian: I thought the numbers looked good. So $37,000 property in probably a B-, C+ area that’s running at $708. I always look at the 1% rule. So if I can buy it for $37,000, can it rent for more than 1% of that a month, which this is almost double that, so it’s almost at that 2% rule. So that’s what I was looking at.
Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?
David Ounanian: My best real estate investing advice ever is to not forget the mindset component of this. Before I got started in investing, if somebody were to ask me how much mindset had to do with being a successful investor, I would’ve said maybe 5% of the equation; and today after doing dozens of deals and helping other people as their agent get started in investing, I can say with 100% confidence that 80% of the success is attributed to mindset and the 20% is really the mechanics or the blueprint for how to do the deal.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?
David Ounanian: Yeah, let’s do it.
Break [00:22:30]:04] to [00:23:40]:07]
Joe Fairless: Best ever book you’ve recently read.
David Ounanian: Best ever book I recently read… I’m gonna have to take this back to the Bible, Joe, because I’ve been consuming so many books, and when you look at the messages and all these different business books and all these different life works, it’s so easy to take that message and say you can find that in the Holy Bible. And so now I really like to– I’ve got an app on my phone where I can search for answers on there, and so that’s something that I’ve gotten into heavily recently.
Joe Fairless: What’s the best ever deal you’ve done that we haven’t talked about already?
David Ounanian: I’d say it’s a four-family that we acquired off market. So this is a property that, on paper, cash-flows about $200 a door, but we were able to take heavy depreciation on it to make all that income essentially tax free. So we did something called a cost segregation study on it, and last year, that alone was responsible for a $33,000 write off on a property that gets $9,000 or $10,000 a month in cash flow. So now that that’s all tax-free cash flow, or deferred cash flow, which long-term the plan is to just 1031 the property into something larger and keep trading up. So ultimately, that’s probably the best ever.
Joe Fairless: What’s the best ever you’d like to give back to the community?
David Ounanian: Through Big Brothers Big Sisters. I’m a big brother myself, and I’m super, super passionate. I believe everyone is one mentor away from greatness, and there’s so many kids out there that don’t have it as good as we do who are on here listening to this podcast or talking on this podcast. There’s all these kids on these waiting lists that Big Brothers Big Sisters that have called out for help, and in many communities like my own they’re just waiting because there’s not enough people to step up to be a mentor for them.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
David Ounanian: Yeah, you can get a hold of me at agentdavido.com or follow me on social media at @agentdavido.
Joe Fairless: David, thanks for talking about the BRRRR method that you did on specific properties, how you got into it or why you got into it, how you thought about it, so the mindset, and then deal-specific stuff and some things to look out for for us when we enter into deals like this. So thanks for being on the show. Hope you have a best ever day. Talk to you again soon.
David Ounanian: Thanks, Joe. It’s been great. Appreciate it.
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