April 7, 2023

JF3137: The Real Cost of Untapped Equity ft. Stephen Tilton



Stephen Tilton is a realtor and real estate investor based in Orlando, FL. After getting his real estate license in 2015, he quickly began flipping single-family homes before expanding his portfolio to include value-add multifamily properties. In this episode, Stephen discusses strategies for minimizing your initial investment to maximize returns and why it’s best to keep your money moving at all times.

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Stephen Tilton | Real Estate Background

  • Realtor and real estate investor
  • Portfolio:
    • Value-add single-family and multifamily properties
  • Based in: Orlando, FL
  • Say hi to him at: 
  • Best Ever Book: Rich Dad Poor Dad by Robert Kiyosaki
  • Greatest Lesson: Never stop learning, and stay curious.


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Travis Watts: Welcome back, Best Ever listeners. I'm your host, Travis Watts, doing a one-off episode with our guest today. This episode is not part of Passive Investor Tips, which is the series that I host here on Best Ever, but rather I'm just filling in today as a host for our main show, and I'm really excited to bring you today's guest. His name is Stephen Tilton. He's from Orlando, Florida. And listen, Stephen has been a friend of mine for years. He's a realtor, he's a real estate investor, primarily value-add, single family, multifamily... And you know, he and his crew actually renovated one of our houses here in Florida. We've known each other for years, jack of all trades, king of real estate. Stephen, welcome to the show, my friend.

Stephen Tilton: Travis, thank you for that introduction. I appreciate you having me on.

Travis Watts: Always good to catch up, and great to have you here. So listen, before we dive in and get to our topics today, can you give the Best Ever listeners a little more context about your background, where you came from? What's the story so far?

Stephen Tilton: So I am the son of two real estate agents. My mom got into real estate back in 2003 or 2004, and she started quickly making so much money my dad decided he was going to quit his job and make this a family business. So I was kind of exposed to real estate early on; I got a sense of it. Of course, in 2007, that summer, inventory on the market here in Orlando, Florida tripled, and suddenly, nobody could get financing. So the real estate family business crumbled. And that really led me into some construction type roles. I was just 18 years old, graduating high school then, and not really sure what I was going to do, because my plan was to be a realtor up until that point.

So I did a little construction work, I started a landscaping business, until I sold that off and got my real estate license back in 2015. Since then, I've been selling homes, and along the way I started targeting for sale by owners; they were a very interesting group to me, because they all wanted to sell, and I would try to list those homes. And for sale by owners are tough, because they want you to prove your value to them. And definitely, as a new agent it's a hard place to cut your teeth. But if you can figure out the value that you bring as a listing agent, and maximizing the returns for a seller, you can get a lot of for sale by owner listings. But along the way, I started finding these wholesalers, and I started having conversations with them, and just befriending them, getting to know them. Their deals were so much cheaper. Traditionally, for sale by owners would list super-high. They're unrealistic about their price. And these wholesalers were the opposite. They were well below market value, and it was really interesting to me.

And what was funny is I was really just curious about this, and wanting to learn, and back in my alma mater, Keller Williams - best training company in the world, truly - they would say "You can't list those. There's no listing to be had there. So just move on to the next person." I just refused to do that. Well, naturally I attracted investors, because now I can buy properties well below market value, and provide inventory that's private, it's not just out there. And then I could also help them list and sell their home for top dollar. So as I started helping these investors, I started learning from them, and realizing "Wow, I am hunting for quail, when I should be hunting for bison."

And over time, I got into the remodeling game, and we started buying homes and flipping houses, and along the way I met you, Travis, and you gave me so much awesome advice, and we talked about cash flow, really investing, as an underwriting standard, starting with cash flow. If the property doesn't cash flow, you're not interested in it. I know that's how you invest specifically. And so I got into multifamily, one to four-unit multifamily property. I've been able to build up a portfolio there, and it's been an amazing journey. It truly has. And then of course, we've done some remodeling work for other people as well, which also gives us a little extra element of value for our clients.

Travis Watts: I love that. I left wholesaler off my introduction, man; the list just keeps going on and on. It's what I love about what you do and what I do and what everybody does who is being interviewed on the show. It just goes to show how many ways you can make money in real estate. And there isn't a right or wrong. And I think something that I find really intriguing to the deals that you do, because we talk a lot about this stuff... And you're a lot like one of our hosts here, Ash Patel. Ash is the guy that's sort of sitting over on the sidelines waiting to pounce on this killer opportunity that's going to bring him a 20% to 30% annualized cash on cash return. And those deals are kind of few and far between, but when they happen, they're incredible. And that's not the methodology that I subscribe to. I'm of the philosophy there's always a deal at any given time that makes sense, that I want to get into; so every time I got money hit my bank account, I'm trying to push it right back out into something right away. So I'm kind of that dollar-cost average long-term cash flow play guy. But at the same time, some of your deals really make me sit back and reflect and think "Maybe I should just take six months to find one of these killer opportunities." So anyway, pros and cons...

So we were talking offline recently. And this is why I thought you'd be a great guest for the show - there were two underlying topics or themes in our conversation that I felt would be really useful for our listeners. And the first one is boosting returns while minimizing your initial investment. I'd like to start there. Can you explain what that means, and just elaborate for our audience on that topic?

Stephen Tilton: Sure. Well, if you can think about the return on investment calculation, if you can reduce your initial cash outlay, whatever that is - there's a couple of ways you can reduce it. But if you can reduce that, your effective return, even if you made the same money, your capital efficiency goes up significantly. So if you get those sweet deals that guys like Robert Kiyosaki talks about, where you're basically just signing up for the debt, your return on investment is technically infinite from a capital perspective. Now, we all know we had to invest time and energy and effort and user connections, and so on and so forth. But at the end of the day, that's an infinite return. And you'll never need money again if you can find these deals. And really, what I've learned more than just finding these deals is structuring and creating these deals, thinking outside the box about how we can make win/win deals with sellers, and ourselves as investors.

One of the ways we do that is we can earn a commission; if you're a licensed real estate agent, you can get a commission, and there is no rule or law around how big a commission can or cannot be. It's a free open market; at least it still is today. And you are totally able to get a commission of any size. So a lot of times what I'll do when I'm negotiating with a seller is we will establish a purchase price during the course of our negotiations, and once we establish a purchase price and we're putting pen to paper, sometimes even after we've put pen to paper, I will say "Hey, we've set up this deal for $100,000", as an example. Now, the house can probably appraise for 150k. I know this in the back of my mind; or at least my hard money lender's desktop appraisal will give them a number around there. So I can push this -- I have $50,000 to work with. The difference between the contract price and the desktop appraisal price. So that $50,000 I'll say "If you give me a $45,000 commission, Mr. Seller, I will give you an extra $5,000 on the purchase price", because I know that it's going to help me boost my returns, and in the end, you're going to net more money as well. And it's usually something that sellers do not turn me down. In fact, once we've already agreed on a number, adding on to that and saying, "Hey, I'm actually going to make this deal better for you. Is that something you'd be interested in?" And they almost always say yes. So that's one way that we can really reduce our initial cash outlay. Because if we were only putting down 10%, potentially we could get a $40,000 net from that sale. Well, we've got some closing costs. $30,000 net commission when we close, and that just greases the wheels of progress on the flip.

The other thing is if you are thinking you've gotta invest all cash, if you are a Dave Ramsey guy - I'm a big fan of Dave Ramsey. I just think it takes too long to do his method, and I'd rather do it sooner. I would recommend using a lender; get in contact with a great hard money lender. They are going to be one of your best friends and one of your most essential allies in this process. Simply put, by putting in less money, which is essential to boosting those returns, a lender really helps you do that.

Also, be sure when you're interviewing this lender that they will do 100% renovation financing. A lot of times this hard money lender, they want 10% - or now, since rates have come up a lot of, hard money lenders will want more money down, like 20% down. But the renovation portion of the budget that goes into escrow after you close - that portion we really want to be 100% financed on, because that is another way that we can just increase cash flow in the middle of the flip.

Now, other than that, being able to do a flip or renovation quickly minimizes holding costs, things like taxes, insurance, interest on your loan. All those things accrue every single day. So if we can do some things that accelerated the process of the renovation, that's important.

One of the most overlooked things, and sometimes things that busy investors don't think about - plan and quote your renovation, and schedule it while you're under contract. That way, the day you close can be demolition day, and you can kick off that renovation project. And then beyond that, if you're handy and you have some skills in whatever area of remodeling a residential unit is required, whatever skill you've got that you can use, if you can save some money that way. It's really helpful for me; as an example, right now I'm getting quotes for different things. And in many cases, they're so high, especially for smaller projects, I'll just take half of a day and go do it myself and save a few thousand dollars. I know what my time is worth, and sometimes it's actually worth it for me to go do drywall, as an example, or a small fix-up at one of my rental units. I know it's going to take $1,000 to get someone out there to fix that, but if I can go out and do it in half a day. That's something that often I'll go do myself. So doing some work yourself. Planning the renovation while you're still under contract and getting those scheduled and everything lined up will really help you ultimately boost your returns.

Break: [00:12:00.24]

Travis Watts: I love that man. And it's something that hardly anybody talks about, knowing your time value. I've spoke out on my podcast series here a number of times about this, but you're exactly right. There's some things where if you have to hire a skilled tradesman for 100 bucks, 200 bucks an hour to go do something that you can do, it might actually be worth it. But whereas spending all day on a Saturday painting a wall or something, you might be able to find someone for 15 bucks an hour to paint for you.

Stephen Tilton: Exactly.

Travis Watts: To reflect back on -- I spent six and a half years active, like you, but not nearly to the extent of you in single family, and it just makes me realize how amateur I really was during that time. During my first flip, I didn't even own an electric drill. I mean, it was really chaos. Embarrassing to say, but... Listen, man, I appreciate you sharing. There were so many great golden nuggets in that section. Let's transition though -- I do want to make sure we have time to get to the real cost of untapped equity. Can you elaborate on that and share any insights on that theme as well?

Stephen Tilton: Sure. I think for me, in my journey now I've built a portfolio of small multifamily properties. And I'm realizing it's impacting my focus on the other higher value activities that I'm doing. So there's an opportunity cost to having a big deal of equity in these properties. A lot of them have gone up in value. Most of them I've forced value to, and the market has brought them up. So I'm looking at a portfolio that I'm really just getting a meager gain per month or per year of say 12% or 14% cap rate. But if you look at my return on equity, it's terrible, because I've got six figures of equity in each of these properties. So one of the ways that I can boost my return on equity, increase my cash position would be to cash-out refinance. But in this market, with higher interest rates, I'm a little bit less attracted to that. And knowing my skill set, I brought these properties, improved them and stabilized them, my job is really done now. I don't want to be the long-term holder of these properties. If I'm going to do long-term buy and hold, I'd rather do a limited partnership in a real estate syndication, although those get much lower returns than when you have the active income.

Travis, we're talking about active income... I'll give you an example. We bought a triplex in this small tertiary market outside of Orlando, and I paid $227,000 for this property. I got a $20,000 commission, which covered most of my cash down. So I think I had $17,000 in total that I put into the property. I believe the property is worth about $360,000 now, after having spent about $30,000 on it. So I bought it cheap, and I fixed it up, and I didn't completely renovate it, it was mostly a cosmetic rehab... But now we've got six figures of equity in the property and it's cash-flowing like a monster, and it's got a ton of equity. So I could either refinance that out, or I can go ahead and sell it and tap that equity. And like I said, I think rather than doing the property management, I would rather sell this property.

So basically, you've got a huge opportunity cost when you've got big equity sitting in one of those properties. You're either going to want to refinance that property, you're going to want to sell that property, or maybe bring in a partner who can buy out some of that equity from you in return for a share of the cash flow, and then of course, the backend whenever you sell that property. All of this enables you to go do other deals. And I think we underestimate the value and the power of the momentum with money. You go in and add value - I made six figures on this property by adding value to it and stabilizing it on this triplex. But now that money is really just sleeping there; it's giving me $2,000 a month, which is great, but that's nothing in comparison to $150,000 that I could get if I sold it.

Travis Watts: Oh, such great, great, great knowledge. Anybody who's listening who's active, just to think about being a realtor - I was just running some math here on my calculator. I'm going back to my good old days of being active. So $10,000 commissions, we'll say times 15 properties, or whatever... 150 grand in extra potential that I never had, that I could have... And what you said there the last part is what I refer to as the velocity of capital. You're exactly right. And you got to keep your money moving constantly if you want the highest and best returns. And it's incredible if you really run the math.

So we're running out of time here, Stephen... First of all, I appreciate the insights, the stories, the practical references; if you wouldn't mind, could you give the Best Ever listeners your best ever real estate investing advice?

Stephen Tilton: Never stop learning and stay curious.

Travis Watts: Oh, I love that. Alright, cool. So let's wrap it up here with the lightning round. These are just quick, fast questions, answer as quickly as you can basically... Are you ready for the lightning round?

Stephen Tilton: Let's go.

Travis Watts: Alright, Stephen. So what's the best ever book you recently read, and why?

Stephen Tilton: Rich Dad Poor Dad. I read the cliffnotes once upon a time, I got a lot of the principles from before, but absolutely loved that book.

Travis Watts: That is a great book. Why do you think that's such a great book?

Stephen Tilton: Well, I think if you read that book, you don't need to go to college. It would save you four years. I think it's like $8. I don't know what a college education costs, but I'm willing to wager it's more than that. Literally, the W-2 job is a trap. The buying your single family home and maxing out what you can afford is a trap. Car payments are traps. And all of these things that people get taught all over the place doesn't help. Rich Dad, Poor Dad cuts through all of it, and helps you understand how you can actually make money work for you.

Travis Watts: It's a great foundational book. I agree with you. It wasn't the first book I ever read. A lot of people attribute that to their gateway into real estate. But if you haven't checked it out, I recommend it as well. Great insights. So Stephen, what's the best ever way you like to give back?

Stephen Tilton: I'm a little different than most. Maybe I'm a hippie of sorts, but befriending the lonely and the forgotten. There's a couple of things I do on that front, like visit the jails, or I'll actually be friends with someone on the streets; not just like, "Hey, here's some money." I think that's the easiest thing to do. The harder thing to do is to love them in their imperfection, and just be a friend. Because if you look around, we're the richest country in the world, or one of them, but we're the poorest when it comes to time. So take a little time and sometimes you learn things from the people you least expect.

Travis Watts: And that couldn't be more true; you really do live up to that. I remember when you were wrapping up some of the projects on our house here in Florida, we had asked for a house cleaner to clean up at the end of the job... So you send this lady over that evidently I learned the story later that she's one of your tenants in one of your properties, and that she was having a hard time in her life, and that's why she became your tenant in the first place. So really kind of a cool, full cycle thing that you've done there. So I love that, man. Last question, how can the Best Ever listeners reach you?

Stephen Tilton: My email is tiltonteam@gmail.com. Or you can always send me a text or give me a call. 407-955-2759.

Travis Watts: Thank you so much, Stephen, for being on the show. Always enjoy catching up with you. Everybody listening, have a best ever day. Thank you so much for tuning in, and we'll see you on the next episode.

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