May 19, 2017

JF990: Another Property Closing and WITH NO MONEY, How to Invest in Your 20's #FollowAlongFriday

Let's congratulate Joe on another upcoming closing! Joe and Theo answer our Best Ever Listeners questions, and one including "with no money how do I invest in real estate being so young?" This is a great opportunity to take notes and learn how to jump in the real estate game!

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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 show. We only talk about the best advice ever, we don't get into any of that fluff. We've spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad and a whole bunch of others.

Like we normally do, we've got Theo Hicks co-hosting Follow Along Friday. Good morning, my friend.

Theo Hicks: How's it going, Joe?

Joe Fairless: It's going well. If you are watching this via Facebook live, then feel free to comment below and we'll either answer your question during this episode or next week's episode, if we don't get to it this week. How do you wanna approach today's conversation?

Theo Hicks: We've got three Best Ever listeners' questions we're gonna answer, but first I wanted to pre-congratulate you on closing on another property next week.

Joe Fairless: I hope you didn't just jinx me. [laughter]

Theo Hicks: I don't think I did.

Joe Fairless: Yeah, so we are closing a property in Fort Worth, Texas, most likely next week... Probably Thursday or Friday. We have technically until 2nd June to close, but we're closing a little bit early, because we've got all our ducks in a row. So more to come on that after it closes, but everything's looking good. I appreciate the pre-congratulations.

Theo Hicks: No problem. Let's dive into the questions. First question is from Darius. He said, "I've been reading your book - so Darius, thank you for reading the Best Ever Book - and it has been very anxious investing in real estate. My problem is that I'm 26 with no money saved, and I work a job that I'm not paid well at. Any advice if you were in my situation and what I should do? I'm really excited about my future in real estate and I cannot wait to get started." So kind of a vague, open-ended question, but no money, very low-paying job, a young guy... If you were in this situation, what would be the first the thing that you did? And since I was in this situation a year ago, maybe I could say something on this as well.

Joe Fairless: I'd like to hear your thoughts.

Theo Hicks: So my situation was slightly different just because my job paid a little bit better and I had a decently-sized lump sum of money from my parents to invest in.

Joe Fairless: So how much were you getting paid?

Theo Hicks: I was getting paid about 70k/year.

Joe Fairless: Okay, so you were making 70k, and how old were you?

Theo Hicks: 25.

Joe Fairless: 25, okay.

Theo Hicks: I had no money saved up. I just got out of college, so my [unintelligible 00:04:35.25] I spent everything. But my parents -- I had a college fund of about 20k, which my parents let me use to buy a property. However, I did not know about house hacking at this point.

Joe Fairless: And you got to use that because you got a scholarship.

Theo Hicks: I got to use that because I had a full ride scholarship...

Joe Fairless: You got a full ride scholarship to Ohio State for...

Theo Hicks: Chemical engineering.

Joe Fairless: Chemical engineering. Okay, cool. So they allocated college money, you didn't use it because you've got a big brain...

Theo Hicks: Something like that.

Joe Fairless: ...and you were able to allocate it for the house.

Theo Hicks: Exactly.

Joe Fairless: Okay, cool.

Theo Hicks: So I bought a property for 170k, and I did an FHA owner-occupied loan [unintelligible 00:05:12.18] portion of it, which allows you to include renovations into the loan. So that cost me around $15,000, because I had to pay for the renovations myself. My recommendation would be to house hack. I'm not sure how much not being paid well means. Maybe if you're making 20k a year, save up for a year - I'm sure if you're single you can definitely do that, and that'll be $5,000 and you can use that as a 35% down payment on a house hack, duplex or fourplex, and that would be $5,000. [unintelligible 00:05:44.21] $5,500 down on a $170,000 property.

Joe Fairless: Wow...

Theo Hicks: If you can get a $100,000 property for $3,500 down, if you live in one unit and rent out the other one, and if you're not making a lot of money, even if you're not necessarily making a spread on the rent, you're still gonna be paying less money than you're paying now, and you're gonna get the experience of real estate. Once you end up moving out and moving on to your next property - whether it's to house hack again - you can back fill your unit with a renter and start cash-flowing.

If you have no money and you're a single guy, or if you have an apartment that's willing to house hack - because I know whenever we bring up house hacking on the podcast, it's always important to make sure that your significant other is in on it; you don't wanna just jump in on it without his/her support... But yeah, that's what I would do.

Joe Fairless: Do we know where Darius lives?

Theo Hicks: No.

Joe Fairless: Okay. You nailed it. I only have a couple additional thoughts, but they're adding to what you said, not contradicting or coming up with something revolutionary. One is if Darius lives in New York City - Brooklyn, Manhattan... Since I lived there for ten years, I can say that it's virtually impossible to find something like that, so Darius, you need to go to New Jersey. And then the question becomes "Are you okay going to New Jersey?" or maybe Connecticut or upstate New York and not live in the New York City lifestyle, and you just have to do a cost/benefit analysis there. But if you're not making any money (or very little money) then really, unless your family is there and you have to be there for a certain reason, then you're free to roam somewhere else, and you can probably find a job that you're making as much or more in at a different place.

The second thing is that the way that your question was structured, it's obvious that you're focusing on what you don't have instead of what you do have, and it's important to recognize and give yourself credit for what you do have, your current assets, and that is that you do have access to materials to educate yourself, you do have access to a computer with an e-mail account to send us an e-mail and for us to answer your question. You do have access to others in your market who are successful in real estate investing. You know the English language, you do have the ability to maintain a full-time job... So you have all these assets, and you have more assets than liabilities if you think about it. It's important to go on with that mindset and not necessarily think about what you don't have, but think about what you do have and how can you leverage what you do have to get what you want to have in the future. Theo laid out the concrete, step-by-step plan for doing so.

I think a lot of people tend to shoot for the stars right out of the gate, and believe me, I don't want to be the [unintelligible 00:08:55.11] calling the pretzel salty here, because I also have gone from single-family homes to very large multifamily when most people don't do that. But I got a single family house first, and then I got another, and then I got another, and then I got another, and then I went to large multifamily stuff.

If you don't have real estate right now, then the house-hacking is the best approach to take. If for whatever reason that doesn't work, then talk to some local investors in your area, make sure you attend the weekly or monthly real estate investing meetups... Also go volunteer somewhere - I've talked about this many times before... Not just people who are raising money, because if you volunteer and you are genuinely passionate about a cause, then you become a board member with that volunteer organization and then you start building relationships with other most likely high net worth and affluent individuals, and you do it again, with genuine intentions because you're passionate about that cause, but then eventually you get surrounded by some high achievers.

And even if you're not raising money, if you're just wanting to get started, still go volunteer, because it's gonna give you the perspective and it's gonna help you focus on your assets, not necessarily your liabilities and what you don't have, and really focus on what you do have, and it will reinforce the mindset that I mentioned earlier that I recommend to you.

Theo Hicks: That's great advice. One additional thing that I thought about when you were asking that question... I noticed here one of the first things he says is he has no money saved up, and I remember [unintelligible 00:10:30.07] anyone else that has that same issue of "I don't have money saved up, how do I invest in real estate?" [unintelligible 00:10:37.17] I believe it was part 1 - of the multifamily syndication journey, you're talking about how you make 30k/year, and living in New York City, of all places... And you saved up money for 2-3 years...?

Joe Fairless: Three or four years...

2: Three or four years to save up enough money for your first property. So it [unintelligible 00:10:54.18] I made a lot of money and I spent it all on a bunch of crazy stuff... So I know it's a very small tactical advice, but look at what you're spending money and see if you can cut 5, 10, 20 dollars a month, whether it's some recurring fee you're paying for some internet service you're not necessarily using a lot, like Spotify, or if you're buying five-dollar coffees every single day, or if you're going out to the bars all the time... There's a lot of different ways you can cut expenses.

I remember when I first did my budget and looked at it, and I realized how much money I was spending on fast-food, enemy drinks, and I'm going out... I probably could have bought a property after a year just with that money saved up. That's just another piece of advice for people that may have had financial issues - look at your budget and what you're spending money on and see if there's any way you can cut any amount of money out of that budget to save up for real estate.

Joe Fairless: And using your three specific examples of energy food, fast food and going out - those are the three really good examples that reinforce the point that it's not necessarily the lowering our quality of life by cutting expenses, but ironically or counter-intuitively, we increase our quality of life if we cut out things like energy drinks, fast food and perhaps going out; it depends on what going out entails.

I know Grant Cardone talks about this. I believe he talks about how you shouldn't necessarily cut expenses - you should pay for that five-dollar coffee, you should increase how much money you make in your full-time job. Well, I'm of the mindset it's important to look at what we are spending our money on, and does that truly increase the quality of our life? Because this is a great time to have some self-reflection, not only setting you up for the long-term financially, but to increase the quality of life along the way. Perhaps there are some things that you're spending money on that don't increase your quality of life, and should you replace them with other things that are less expensive, then that will increase your quality of life and you'll be able to save money along the way...

For example, instead of fast-food, you have more healthy choices of food, or you cook, or you have some other way of having food instead of going to Taco Bell or KFC or whatever. Energy drinks - drink water, or a liter of water with wheatgrass, that will give you all the energy you need.

Theo Hicks: Or work out.

Joe Fairless: Or work out, yeah. Going out - again, it depends on what the going out entails, but that's also a thought that I recommend that you think about when you're going through this.

Theo Hicks: [unintelligible 00:13:29.18] expense and say "Is this adding quality to my life or is this taking away?" It's counter-intuitive, because spending a lot of money on certain things that if you actually stopped spending money on that not only will you be saving more money, but also you wouldn't be having that energy drink hangover, that fast-food hangover or the actual going out hangover.

Joe Fairless: Statistically, after you make $50,000 you have 0% increase in your likelihood of happiness, period. Let me rephrase that, because I butchered that. People who make 0 to $50,000, they are not as happy because they don't have the things that they need paid for or accounted for - food, water, shelter, other things. But once you make $50,000 and you can go from $50,000 to 5 million dollars, your level of happiness doesn't increase based on the amount of money you make after $50,000, and that's important to note. So if we're making more than $50,000, then if we're not happy, it's not a money thing, it's what we focus on and what's important to us and how we spend our time and how are we contributing and are we fulfilled thing.

Theo Hicks: That's [unintelligible 00:14:38.16] a huge insight to understand, because it can save us a lot of time. If you're just chasing after money, you realize based on that study that it's not gonna actually add to the quality of your life, just specifically the dollar amount in your bank account going up [unintelligible 00:14:50.11] what you do with that money, but if you just are focusing on the money, you don't get happier. That's good insight.

Joe Fairless: A good documentary to watch, and we'll move on to the next one, is Happy :) on Netflix (that's what the cover looks like). Search "Happy" on Netflix, and it's a documentary and they reference this study that I've just mentioned.

Theo Hicks: I'll have to watch that, I haven't watched it.

Joe Fairless: It's great.

Theo Hicks: Okay, we've got you covered, Darius. The next question is from Vic, and it is based off of a conversation from last week. "Hey, Joe. I thought the syndicator would also get monthly income based on the amount of ownership he has. For example, if I syndicated a deal and I put zero of my own money down on a 150k deal, my investors/partner would put up all the down payment for the loan and the closing costs." So Vic has no money in the deal whatsoever, his partner has all the money in the deal, "...thus he would be getting 70%-80% of ownership and I'd get the remaining 20%-30%, which means I'd also collect 20%-30% monthly net income that the property produces. Isn't that the way it should be structured?"

I think this is based off of the last week or two weeks ago when someone asked a question about how they had all the experience and they wanted to bring in a money partner. We ran through all the different examples of how they should structure that partnership, and I guess what he's asking here is [unintelligible 00:16:14.17] 70/30, basically all the income is split: 70% goes to you, 30% goes to me on a monthly or a quarterly basis." I think he's asking for verification, if that's the case.

Joe Fairless: Will you succinctly repeat the question? I had a hard time following that... Maybe because I was also picking up Jack... [laughter] Colleen and ours 13-pound Yorkie. He distracted me. I heard it all, but I didn't understand what's the one-line question.

Theo Hicks: The one-line question is if he is not bringing any money and the structure of the partnership is 30/70 with the investor, does that mean that per month 70% of the income goes to the investor and 30% goes to him, even though he has no money in the deal?

Joe Fairless: Well, having no money in the deal isn't relevant after the deal, if he's talking about the structure. So it's two things: one is how do you structure it to begin with? If he has already structured it 70/30, then yeah, 70% of the distributions go to the investor, 30% go to him, if there's not a preferred return... Which industry standard is there will be a preferred return to the limited partner, i.e. his investor. So if there's a preferred return, let's say 8%, then the first 8% of the cashflow distributions go to the limited partner, and then depending on how they have it set up, it's either the general partner gets caught up on the 30% that was already distributed, or it just splits 70/30 thereafter.

Theo Hicks: Exactly, okay. I think he was just asking for verification... Maybe he was confused of what we were talking about last week. At the end, Vic, you said that "Is this the way that it should be structured?" and as we've talked about many times in this podcast, it kind of just depends on what you wanna do and what your investor wants to do.

Joe Fairless: Yeah... I have to think of a good analogy, because I get this question a lot, or we get this question a lot - "How should I structure it with investors?" However the hell you wanna structure it with investors, but they have to buy in on it and it has to make sense for the actual deal you're buying, and you have to make money along the way so that you care about the results too, and there has to be alignment of interest with you and the investors, so that your financial compensation is largely connected to the success of the project.

We could spend a whole 60-minute episode on different ways you could structure deals, and maybe we'll do that. Maybe we'll just brainstorm for an episode. It's really a matter of what you bring to the table and how you wanna structure it and what you're looking to get out of it and what the market will command.

Theo Hicks: I've got [unintelligible 00:18:59.10] trying to think of a good analogy. I think I might have it, but I don't wanna say it right now.

Joe Fairless: Save that

Theo Hicks: I'm gonna think about it, I might write a blog post on it, and then we'll talk about it.

Joe Fairless: Tune in the next week! What a tease! [laughter]

Theo Hicks: Yeah, mind state analogy. Okay, so hopefully that covered your question, Vic. I believe it did. Our last question is from Pancham, who's one of our clients... I was having a conversation with him yesterday and he had a very interesting question that I did not know the answer to, so I wanted to ask you... Essentially, he found a deal that if they buy it currently it's gonna have a cash-on-cash return of 4%. So as is - 4% cash return. It's in a really good area, it's in an A-area, and it hasn't been updated since the 1980s, I believe. After putting in a certain amount of money per unit, they're going to raise the rent so that the cash-on-cash return is now 12%, after improvements. So how do you approach a deal where when you're buying it the cash-on-cash return is way to low to pay back yourself or your investors, but after six months to a year of renovations it's conservatively a cash-on-cash return of 12%?

Joe Fairless: A couple things - one is I'd wanna know what the word "currently" means when they say it's 4% cash-on-cash return. Is that based on the seller's financials, or is that based on Pancham's underwriting? If it's based on the seller's financials, that might not be 4%, because we've got to use our underwriting assumptions and how we'll operate it, not how they'll operate it. So that's number one.

Number two is the 4% return - well, if they have investors who are okay with a 4% return over the first couple of years, then it sounds like a great opportunity, because if you can increase rents through renovations if the rents are below market... It goes back to what we were talking about earlier - it depends on your investors. It depends on 1) your underwriting assumptions, first and foremost, if it truly is a 4% cash-on-cash return based on how WE would operate it, but then 2) it depends on the [unintelligible 00:21:13.02] and if they're okay with 4% or not.

Theo Hicks: Okay. So from your perspective, I know the deals you invest in there is value add, so obviously, when you buy them they're not stabilized or where you wanna be, so you wait to pay your investors the preferred returns as it's stabilized at the new value, or how does that work?

Joe Fairless: We buy properties that can return our preferred return right out of the gate, and if they can't, then what we'll do is the vast majority of it will be able to be returned through the property. But maybe there's 1% of the 8% return that the operating account is funding while we're doing the renovations, and we have an operating account at the beginning, so that we have the flexibility if a scenario comes up where we need to use the funds. So an unexpected expense, some sort of unexpected dip in occupancy, something like that. But the vast majority of the time we'll simply buy properties that can return the preferred return immediately.

Theo Hicks: If it does dips below 8% - maybe it's like 6%, then there's no 2% you'll pull from the operating bucket until it reaches above 8% again.

Joe Fairless: Yup.

Theo Hicks: Okay, that's interesting. Something else I'm thinking right now - I'm not sure if this is possible, but let's say it does 4% cash-on-cash return for the first six months and then goes up to 12%... Obviously, you can cover that 4% from your operating budget, but could you also essentially have it so that if it's 4% this month, then we owe you the extra 4% the next month, and it kind of compounds...

Joe Fairless: Yeah, it accrues... If you don't pay what is projected within your preferred return... Let's say it's 8% - if you only pay 4% over the first year instead of 8%, then that additional 4% is accrued to the next quarter or the next month, and it continues to be accrued until you catch up, all the way until you sell the property, and at that point it would be returned... Or if there's no profit there, then they would get all the money and you wouldn't get anything, because a preferred return was [unintelligible 00:23:33.12]

Theo Hicks: Okay, makes sense. That covers Pancham's question, and I think the analogy I'm gonna create might help him as well here.

Joe Fairless: Excellent. Well, talk about a reason to tune in next week...

Theo Hicks: Yes!

Joe Fairless: ...that's for sure! Well, next week's gonna be a big one for us, closing on an apartment community in Fort Worth, Texas, and then this time next month(ish) closing on another property, that one in Dallas, Texas. So a lot of action, looking forward to that. Best Ever listeners, thanks for joining the conversation today.

You can go read through the transcript of this episode at, and if you haven't gotten the resources guide that we've put together, it's on Apartment Investing, and you can receive it for free. Just e-mail It's a resources guide of all these free resources, and I think books, too... Obviously, those aren't free; you've gotta go on Amazon and buy the books, or wherever you buy books. But it's a bunch of websites and podcasts and books and different economic development tools that you can go to and check out different market scenarios and statuses of where markets are at. So e-mail and we'll get you that free resources guide.

I hope you have a best ever weekend, and we'll talk to you soon.

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