Real Estate Nerds

Welcome back to the Real Estate Nerds Podcast. On today’s Best Deals episode, our host, real estate attorney Scott Smith welcomes fellow investor Frank Rolfe. Most of us don’t think of mobile homes as goldmines, but Frank tells a strange and true story of how a low-budget trailer park became his best deal. In fact, the deal went so well that it laid the groundwork for Frank’s current successful real estate empire of mobile home parks across the America.

The Dollar General of Housing: The Beginnings of Frank’s Mobile Home Best Deal

Scott and Charles discuss Charles’ background, real estate debut, and current career as an investing coach. We also get the see some of Charles’ teaching side as he shares some tips and strategies that he advises his students to use.

[1:00] Frank and his partner Dave Reynolds are the 5th largest mobile home park owners in the U.S., with hundreds of properties across the country. The Best Deal he came to discuss today is actually the first deal he ever did.

[2:00] Frank entered the real estate industry in 1996 after selling his billboard business. He chose to invest in mobile home parks because the asset class wasn’t particularly popular. At the time, he saw these homes as “the Dollar General of housing,” and the idea of providing affordable housing appealed to him.

[3:00] This deal was for a mobile home park called Glenhaven in Dallas, TX. Frank put $10,000 down without even viewing the property, with the remaining $300,000+ financed over a 30-year-mortgage. He knew little about the area and nothing about properties. He only knew the contact who sold him the properties because he had created billboards for him.

[5:00] Frank knew the property was on a highway and that mobile home zoning is fairly rare in the area. He was attracted to the park because he knew he wanted “basic” housing: “I like industries that are built on cheapness. I liked the fact that the park was the cheapest, most bargain basement housing.” [5:28] He took the deal primarily because the financing terms were excellent, and was prepared for there to be some kind of catch. Yet he personally knew the seller was losing $2,000 a month on the property. Frank, on the other hand, was able to assume this risk easily and had an exit strategy in case the investment wasn’t profitable.

[6:15] Frank quickly determined that the property manager was the first thing that had to go, and in fact, the reason the property was losing $2,000 per month. Knowing this was the problem made taking a chance worthwhile: “I was willing to give it a whirl. I was willing to lose $10,000 to see if I could fix it.”

If I screwed up, I got scared, I could always push the eject button and be safe.

CLICK TO TWEET

How Frank’s “Wacky Subdivision” Became a Business Model

Frank describes how his trailer park full of odd and colorful characters became a surprising investing success.

[7:30] After closing on the property a mere three weeks later, Frank had the opportunity to view profit and loss statements. He noticed something odd: a cable TV bill for $3,000/month. For an 83-lot unit, this contract seemed large, and Frank later learned it had already ended. He simply canceled the contract, as this amenity was unnecessary given the property was 50% vacant and residents had alternatives. This small change allowed Frank to break even immediately.

[9:30] Scott asks how Frank approached the lack of perfect records regarding the park. He was able to discern how many homes were actually occupied, and therefore get a sense of his revenue. The city was able to provide records of the cost of utilities. Although he was new to the industry, he was able to verify the financial statements.

[12:00] Frank was able to get legal work done for free through the title company. Given that he bought the property with a non-recourse loan (meaning he could give it back to the seller), he went into the investment with relative peace of mind.

[13:00] To better understand his property and residents, Frank decided to sit in the trailer-office daily for a year. He didn’t know what to expect: “I felt like I’d bought OK Corral. The first thing I did was get a Texas handgun license so I could have a pistol in my pocket in when I showed up.” [13:57] He recognizes in retrospect he may have been biased, and while his residents were poor, they certainly weren’t dangerous. Fortunately, he never needed his pistol.

[14:37] Frank was surprised by “This was basically like a high-density subdivision, or in the case of this property, a subdivision full of wacky people. But that changed dramatically in the months ahead.” He had a cast of characters in his park “worthy of their own sitcoms.”

[16:00] While property management wasn’t the best expense of Frank’s time, he did learn a lot. During this time, he got a tip about another park that was being shut down. He was able to get both trailers and residents from the closing property,

[17:24] This chance encounter became a lucky break for Frank “I was able to take Glenhaven from half-occupied to fully-occupied at no cost.”

[18:00] Frank’s new residents were very different from his trailer park’s original occupants. Most were hard-working people, rather than the eccentric types he had grown accustomed to. His “menagerie of nutcases” became a stable business model.

If it’s got little risk and high reward, you should always do it. If it’s got high risk and little…

CLICK TO TWEET

The Takeaways: The Power of Financing and Risk vs. Reward

Scott and Frank close the episode by highlighting the biggest lessons Frank learned from his first mobile home park, as well as what ultimately became of Glenhaven.

[19:00] In Frank’s opinion, the major lesson he learned was about the power of seller financing.

[19:37] The other major lesson Frank learned from this excellent mobile home deal was about risk and reward: “If there’s little risk and high reward, you should always do it. If there’s high risk and no reward, you should never do it.”

[20:00] Scott observes Frank’s story is also about the power of networking. He found his deal through his billboard business, and his quirky residents ended up helping him develop a successful business investing in

[21:14] “One thing I learned early on about mobile home parks is that there’s a huge amount of demand,” Frank shares. He also lucked into very low lot rentals, which were appealing to his customer base. This also allowed him to raise rents while keeping full occupancy. He later sold the property for $1.5 million after buying it for only $400,000,

[22:43] Frank’s greatest takeaway from his first deal is the groundwork it laid for his future success: “The success of Glenhaven is what gave me the confidence to buy Park #2, Park #3, Park #4, and now of course we’re at 300...It’s the little things that make the big things possible.”

Sometimes, no matter how talented, smart, or experienced we are, Lady Luck just isn’t on our side. Welcome back to the Real Estate Nerds Podcast. On today’s Bad Beats episode, our host, real estate attorney Scott Smith chats with fellow attorney and multi-family investor Charles Dobens about one of Charles’ worst deals. Though the show focuses on a purchase of a C-class property that went wrong, Charles is an extremely successful owner of multiple apartment complexes who regularly advises new investors about multi-family investing. His coaching career has been informed by both his wins and losses. That said, we had Charles dig up the dirt on his all-time worst deal so that you, dear listeners, can learn from what went wrong.

Charles Dobens and The Wild World of Multi-Family Investing

Scott and Charles discuss Charles’ background, real estate debut, and current career as an investing coach. We also get the see some of Charles’ teaching side as he shares some tips and strategies that he advises his students to use.

[2:00] Scott asks Charles about his entrance into the multi-family investing game. Charles was one of those strange children who aspired to enter the insurance business, but also attended law school. At 40, his level of dissatisfaction with his work life drove him to look into multi-family investing. He sold his insurance to fulfil a lifelong dream of becoming an apartment owner

[3:15] After the market crashed, Charles began representing fellow investors who had suffered from bad deals. This led him to his current coaching career, which involves teaching fellow investors to invest in multi-family units successfully.

[5:18] While he has enjoyed many successes, Charles credits his failure with teaching him to how to evaluate the likelihood of an investment succeeding upfront. He shares a tip with our listeners that he usually reserves for his students: “Owning a multi-family property changes your life. And you have to know if it’s going to change your life for the better, or for the worse.”

[6:00] Charles believes being an owner-operator gave him the motivation to understand numbers. “The thing that really taught me the most about properties was owning them, understanding the numbers, and knowing what it really costs to own a property.” Failure to understand the numbers can tank an otherwise smart investment.

[7:30] Scott gets Charles’ take on partnering with more experienced investor for their first deals. Charles agrees that this strategy is sound and useful for both parties, pointing to many successful ventures he has seen his own students experience.

Charles Dobens’ C-Class Crash

Scott and Charles examine the details of Charles’s worst deal, the purchase of an apartment complex in a less-than-glamorous part of Fort Worth, Texas

[8:30] Brokers assured Charles that the area his 160-unit complex was located in was gentrifying, and therefore property values would rise. In retrospect, Charles knows this isn’t true and the area may not change for an additional 30 years. He was unfamiliar with the location within Fort Worth and its particular market conditions. But he felt secure in the purchase because the seller had multiple similar properties, some even in the same location. But they key issue with Charles’ property is that it had be purchased as an assumption.

[9:20] Buying as an assumption meant Charles agreed to take on the existing mortgage from the seller. He thens negotiated a price of $1.1 million for the complex, and agreed to put 10% down.

[11:00] Scott and Charles appreciate the irony that this looked like an excellent deal. Charles was pleased with his own negotiation skills, and thrilled to pay $100,00 for a coj=mplex valued in the millions. At the time of his purchase, the occupancy rate was 97%. The deal looked beautiful on paper.

[13:40] Charles explains the critical difference between a normal deal and an assumption: “When you’re doing a typical real estate deal there are two parties involved: the buyer and seller But when you’re buying an assumption, there’s a third party--and it’s the bank. They don’t care about the agreement you had with the seller.”

[14:27] Despite having negotiated a great deal and agreeing to a set mortgage amount, the bank demanded more money. The bank required Charles to deposit $200,000 into the bank, or else he would be declined for the mortgage.

[15:30] The inspection terms of Charles’ deal were also unusual and disturbing. He was allowed to inspect the property once, then forbidden to do so again for five months. This detail still irks Charles: “Do you know what can happen to a multi-family property in five months? You can lose the whole thing.”

[17:00] Charles’ property management company later tipped him off to a fraudulent aspect of the deal. When numbers weren’t adding up, He discovered that the occupancy rate was only 50%--half of what he was promised.

[18:14]In retrospect, Charles realizes he should have crafted a better contract that allowed him to return to return to the property and walk the units at any time. He also recommends a clause that states if units are not rent-ready, some money should be returned upon closing,

[19:00] Charles began collecting the evidence of fraud. He made a startling discovery: “What they did was white out the name of somebody else on the lease, and then hand write in somebody else’s name on the lease from another property that the guy owns.” The seller forgot to white out eight of the leases.

Charles explains that the trick he fell for is a type of fraud called phantom leases.

[20:37] Charles was never able to get occupancy above 70%. His deal had hidden economic terms, and he now realizes the entire affair was a disaster: “We did everything wrong on this. It was an incredible and expensive learning lesson.”

The Takeaways: Watch the Numbers, Document Everything, and Get Help Evaluating Your Deals

Our host and guest wrap up the show by going over some of the major lessons Charles learned from his experience with fraud and losing big. Charles continues to share some of these bits of wisdom with his students.

[21:00}Because of this bad deal, Charles now is much more vigilant about due diligence: “I don’t believe anything anyone tells me. Everything needs to be documented.”

[22:0] Charles also advises that investors look at the bank statements to see where money is coming from. He explains that “anything ending in three zeros” is a major red flag. If that much money is coming in, it’s probably an owner contribution. Rent deposits aren’t that high, and it’s a sign that the property is performing so poorly that the owner is making up the difference.

[23:00] Scott asks what Charles learned from this deal, and what advice he’d give his younger self to avoid losing on this investment. He gives a series of questions he would ask, and examines his beliefs and assumptions about both the property and its market.

[25:29] Scott agrees, adding: “Challenging assumptions is the number one way we get to high level learning.”

[26:00] Charles had a student looking at an assumption, and how he examined the number.The clause about the assumption was vague, and they made an offer that did not involve assumption and did some digging to determine the real cost of the property. The bank’s reserve replacements would go to the seller, but be collected from the buyer. When making an assumption deal, look out for this detail to avoid owing a hidden additional cost.

[30:00] As both an experienced investor and attorney, Charles advocates for his clients and looks out for new investors. He regularly takes on new investors and guides them through the world of multi-family investing.

Welcome back to the Real Estate Nerds Podcast. On today’s episode, our host and attorney Scott Smith welcomes Dmitriy Fomichenko, the founder of the financial firm Sense Financial Services LLC. The two investors share an affection for self-directed investing of retirement plan assets, and listeners will get to hear exactly why. In addition, Dmitriy also shares about a pair of lending investments he personally made, and what made one a success and the other a failure.

Self-Directed Investing 101

Dmitriy sits down with Scott to chat about his business and self-directed investing generally. The two investors explore the role of retirement planning professionals and compare the self-directed options available to investors.

[2:00] Dmitriy is an engineer by education. After a lay-off, he transitioned into real estate. During this time, he handled conventional financial accounts. In 2010, he founded Sense Financial, a group that deals exclusively with investors. His clients include many real estate investors, but also lenders and investors in newer nontraditional assets like cryptocurrency.

[4:00] Dmitriy and Scott discuss the benefits of self-directed investing. Dmitriy points out that Checkbook Control accounts give investors the power to invest in nontraditional assets. He also shares the various ways to fund self-directed IRAs and 401(k)s.

[5:30] Dmitriy briefly compares the self-directed IRA to the Solo 401(k). He feels the self-directed IRA option is somewhat limited by its fairly low contribution limits Although the Solo 401(k) is designed for self-employed individuals and small businesses, many types of professionals can qualify. He believes it is a powerful investment vehicle that allows for a high level of tax savings.

[6:50] Dmitriy’s company sets up trusts to hold plan assets for clients who own Solo 401(k)s. The client becomes the trustee receives Checkbook Control. He mentions that “You need to be educated on what you can and cannot do, because with freedom comes great responsibility.” [07:25]

[8:45] The clients Dmitriy works with enjoy the ability to control their assets: “You want to be in control? Use the guidance of professionals with more experience than you, but you should be making the financial decisions. That’s what the self-directed 401(k) enables you to do.”

[9:30] Scott asks Dmitriy about how investors can evaluate providers of self-directed accounts. Dmitriy explains that there are three self-directed options:

A truly self-directed IRA. This is an IRA that does not limit your investment choices. Most custodians will limit your options to financial products they offer, and require you to go through them to make or liquidate an investment.

The checkbook-controlled IRA, or IRA-owned LLC. This is Dmitriy’s specialty, an IRA account with funds moved to an LLC that the client controls.

The self-directed Solo 401(k). Dmitriy believes this vehicle is the “best of all” because of its many benefits, flexibility, and tax benefits.

[12:49] Scott asks Dmitriy about Solo 401(k) compliance, and which pieces his company handles and which are the responsibility of the clients. His company deals with plan creation, documentation, and maintaining and updating plan documents per IRS regulations. The client, on the other hand, must control the plan assets and keep accurate records of the investments. Clients can also get assistance with administering the plan from their professionals.

[15:00] Dimitriy clarifies the role of companies like his: “We aren’t attorneys. Our specialty is the 401(k), so that’s what we do. We don’t give you investment, tax, or legal advice.” While as an investor himself, Dmitriy certainly may have the experience to offer this type of guidance, he will generally know when to refer clients to a financial advisor or attorney.

A Tale of Two Notes: Dmitriy’s Best and Worst Solo 401(k) Investments

Scott asks Dmitriy about some of the best and worst deals he has seen made with the self-directed Solo 401(k). In his line of work, Dmitriy has seen plenty of both.

[16:50] Dmitriy decides to begin with an example of a bad deal. This particular example is of a private lending deal. He was advised to use a company offering investments in notes. He chose to invest in a small note for $20,000 tied to a property in Pennsylvania.

[17:31] In hindsight, Dmitriy can tell you exactly where he went wrong: “The mistake I made from the very beginning is not doing my due diligence.” He overlooked his part because he trusted the individual who introduced him to the company.

[18:04] Dmitriy later invested an additional $43,000 on a separate property. Things went well for a couple of years, until there were major property management and late payment issues. Dmitriy reached out to the owner. It turned out his $20,000 property was in terrible shape, had never been rehabbed as it was supposed to be, and had been vacant.

[19:10] Scott asks if what happened with Dmitriy’s money was theft--but because Dmitriy was lending the money, it technically wasn’t. Again, he emphasizes the importance of doing due diligence on properties: “When you invest in a note, there’s always a likelihood that it will be defaulted.” [19:50] He feels he should have discussed his deal with a more experienced investor as part of better due diligence.

[21:09] Dmitriy shifts gears into one of his best deals, another note, which helped offset the loss from the first deal he talked about. He made a loan of $43,000 in exchange for the deed to a property worth close to $70,000. He became the landlord and had a tenant paying to live there, and the interest on the note was around the same amount as the rent, effectively doubling his income.

[22:03] “If you look at these two notes, I ended up winning. But what I want your listeners to learn from this is you’ve got to do your due diligence,” Dmitriy tells Scott.

The Takeaways: Good Communication and Due Diligence Create Wins

Our host and guest conclude by comparing the note deals and sussing out what made one so much better than the other.

[23:00] When comparing the two notes, Dmitriy highlights that the win covered the loss. He chose to keep the second property because it was a better value. He could have foreclosed on it, but the borrowers chose to deed it to him instead after defaulting.

[24:40] Dmitriy won in part because the people he loaned money to defaulted, and failed to manage their own portfolios well.

[26:00}Scott observes that Dmitry’s good communication with his borrowers played a major role in his investment’s success. In his own line of work with real estate investors, Scott sees a lack of clear, consistent communication contribute to unnecessary losses.

On today’s episode of the Real Estate Nerds Podcast, our host Scott Smith sits down with Fernando Aires. On top of being a long time real estate investor, Fernando is also a tech guru on the forefront of leveraging data and analysis to make the best deals possible. The two investors had a fascinating conversation about Fernando’s unique approach to data, his best deal, and how investors can leverage both numbers and people in negotiations.

The Data Doesn't Lie: Real Estate, Biohacking, and Fernando Aires' Unique Perspective

Scott asks Fernando about his background and the inspiration for the investment tools he has developed.

[1:44] Fernando talks about his current career and background. He currently self-describes as "an entrepreneur in income property investing in software applications." He came up in the tech industry, specifically in computer chip design for Apple and other major companies. When he sought income opportunities outside of the tech sector, he developed an interest in real estate for its passive income potential. Fernando developed a portfolio of rentals across the country that eventually earned enough income to retire from Corporate America.

[2:40] After his transition, Fernando bought a software company and developed a tool that allows real estate investors to evaluate properties and analyze their investments from a data standpoint.

[3:12] Fernando shares his deep interest in biohacking and longevity. He is a Bulletproof coach with BulletProofExec.com. He also hosts a podcast with Jason Jason Hartman called the Longevity and Biohacking Podcast Show.

[03:48] Scott observes the connection between Fernando’s two interests. Both health and real estate see many trends, but “The data doesn't lie on what really matters, right?”

[04:09] Fernando's engineering background gave him a love of data that spills into all aspects of his life. He personally analyzes blood tests and biomarkers twice a year to track his health trends and analyze how his lifestyle is affecting his health. Fernando's experience with biohacking informed his analysis of real estate. As both a user and service provider, Fernando sees both sides of his tools: “The more involved an investor is, the more educated decisions can be made and therefore fine tuning the portfolio as it goes along becomes a lot easier.”

[05:10] Scott observes that Fernando's software allows investors to see where their time is most effectively spent. He finds having tools to analyze this data makes the process of managing his dozens of properties more efficient.

[Tweet "As long as you're straight with the people you're doing business with, you respect them, you're trustworthy, then doors will open."]

Fernando’s Best Deal

Scott and Fernando dive into the details and context of his best deal.

[8:30] Fernando’s best deal was one of his early ones. In 2012-2013, he formed a relationship with a bank that was seeking out investors to buy properties the bank had foreclosed on.

[09:45]Fernando looked at a package of 14 properties, and selected 10 with a high rent-to-value ratio. These were B+-A properties with higher-income tenants. He was able to find properties with 90% loan-to-value ratios, with excellent loan terms, fixed rates for a decade, and caps on the interest rates to prevent them from rising above 5%.

[11:40] Fernando purchased properties valued at over $1.5 million for less than $200,000 down. Today, these properties are worth over $2.2 million, with a return on his investment of around 384%. Fernando explains that this figure is calculated based on his actual money down.

[15:00] Scott asks more about how Fernando developed the relationship with the bank that allowed this deal to happen. Fernando’s advice is practical: “There’s nothing magic about relationships. The easiest way to build a relationship is to get started. That’s the first step.” [16:00] He also shares how he established a relationship in a new market by simply doing some research and building a good reputation.

[18:00] Scott agrees and points out that anyone can go into a bank and share their plans for feedback from the banking staff. Fernando agrees that you don’t need to know much to get started. He also finds that smaller community banks and credit unions have a better understanding of the investor mentality than large household name banks.

[Tweet "As long as you're straight with the people you're doing business with, you respect them, you're trustworthy, then doors will open."]

Lessons from Fernando’s Best Deal: The Value of Data and Good Relationships

Fernando and Scott analyze some of the lessons Fernando learned from this particular deal. The two also see Fernando’s success story as a lesson on the importance of relationships in investing.

[22:00] Scott alludes to the common dilemma new and experienced investors find themselves in--wondering where deals come from. He and Fernando agree it comes down to relationships. “If you’re straight with the people you do business with, and they see that you’ respect them and are trustworthy, doors will open.” [22:28]

[23:00] Scott asks whether Fernando saw any red flags with this deal. Fernando had concerns that the properties weren’t generating enough rent. Fortunately, rents did increase quickly enough to raise the initially low rent-to-value ratios.

[25:35] A major lesson Fernando learned from this deal is that that tenants in this class of properties tend to stay in their homes longer, which yields better returns. The deal didn’t look as good on paper as it ended up being in the long run.

[26:45] Fernando shares another lesson: “You have to buy the property that makes sense the day you buy it. If you buy a property hoping it will appreciate and having no other exit strategy, that’s gambling, not investing. If you’re not getting a real return, you’re not investing.” He did gamble a bit, but had an exit strategy in case the properties didn’t work out that would have returned him to his baseline. He knew he could sell the properties off easily if they weren’t profitable.

[28:00] Scott asks for details on Fernando’s negotiations with the bank. Fernando admits he didn’t have to do much haggling, but that his inspections revealed some issues with the property he had to ask the bank to fix. The bank was reluctant to make repairs, but ultimately did.

[31:00] Scott and Fernando discuss the value of langauge in negotiations. Fernando doesn’t let fear of losing the deal prevent him from asking for what he wants or needs, provided he’s being reasonable. He reasons that: “A good deal has to be good for both sides.” [32:59]

[34:00] Negotiations present another area where data is valuable for Fernando: “If you’re trying to gain leverage somehow, having data makes lots of sense.” Data also allows people to justify their decisions to higher-ups.

[37:00] Scott notices that some of the best negotiators he has seen are like Fernando--kind to people and nice in relationships, but hard on data.

The Takeaway: Data Drives Better Decisions

Scott and Fernando wrap up the show with some practical tips on incorporating data into an investing strategy. That said, his data is only so effective because he is also focusing on relationship-building.

[40:00] When comparing the two notes, Dmitriy highlights that the win covered the loss. He chose to keep the second property because it was a better value. He could have foreclosed on it, but the borrowers chose to deed it to him instead after defaulting.

[44:20] Scott agrees that “You can’t find out everything from behind a desktop. You need to go out and meet the people.”

Welcome back to The Real Estate Nerds Podcast! On today’s Bad Beats episode, we learn the power of knowing what you know, and knowing what you don’t. Our host and real estate attorney Scott Smith welcomes Gino Barbaro, a life coach, fellow investor, and host of the popular Jake and Gino Podcast. Gino Barbaro, co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing, takes us through what’s it like when the deal you’re most excited about ends up being your worst. Then he and Scott answer the critical question: where do you start again after an investing failure?

Gino’s Worst Deal

Scott introduces Gino and gets right into the details of his worst deal, as well as other lesser real estate blunders he’s made along his path to multi-family success.

[2:00] Gino began investing in real estate after college, while also following his father into the restaurant business. His first deal was in 2002, and he selected a multi-family property for his first purchase. He was motivated to enter real estate to break away from exhausting 60-hour work weeks and working for another person. Excited by the initial success of his first property, he eagerly purchased a mixed-use property just before the crash.

[3:00] Gino’s motivations to become a self-made success contributed to his self-described fatal flaw: a lack of education. He lacked fundamental negotiation skills, market and asset class understanding, and other knowledge that is crucial to real estate success. In retrospect, he believes he should have gotten advice from a more experienced investor. He confirms he wouldn’t buy this same property today for one simple reason: its location in New York, a city rif with complicated economic challenges that affect investors and renters alike.

[4:00] The complications around his multi-class New York property led Gino to get back to his roots: multi-family. But that didn’t stop him from making some other mistakes along the way.

[5:00] Gino has lost money on more than one occasion because of getting caught up in excitement, lacking familiarity with his asset class, and buying before getting enough information. He tells Scott about a different investment that ended up losing him $170,000 because he failed to do his due diligence. This particular deal was for a mobile home park.

[5:20] Scott asks Gino about the details of the asset that ended up being his worst deal. Gino explains that it was a mixed-use building, equal parts retail, industrial, and office space in New York City. Leasing the office space in particular became a challenge.

[6:30] Start the same. Gino was excited to get into the deal because it was something different. Scott points out that excitement clouds judgment, and Gino agrees that this was the case for him. He made multiple mistakes that are common for new investors, such as sinking far too much money into repairs.

[7:45] Gino can now see his two biggest issues: his blind spots and his ego.

On Risk: Knowing When to Be Brave

[8:00]Gino’s critical error by his own admission was failing to understand the numbers. Falling in love with property quote[8:09] Learning the business is more important for those starting out than focusing on lofty ambitions.

[9:00] One of Gino’s strengths is his ability to confront fears to take risks. He advises that investors weigh the pros and cons, and if pros win, that is motivation enough to take a risk that could be profitable.

[10:00] Scott relates to Gino’s risk assessment strategy of determining the worst case scenario, and facing it head-on if financially possible. This was something Scott personally experienced in his former life as a litigation attorney.

[10:10] “When I was doing litigation, I spent two years in there and realized everybody hated their lives, hated what they were doing.When I wanted to make the shift to go do Royal Legal Solutions and help real estate investors ... I asked myself, ‘How quickly can I go get another job if this doesn't work out?’” When Scott realized he could financially recover inside of a month, he took the leap and created the firm that he still leads today.

[11:00] Our guest and host conclude that approaching your ambitions logically can save you a lot of grief and money. Gino asserts: “Look at things logically. Emotions lower intelligence. That’s what happens. I was emotional about this thing. But at the same time, you need the emotions to take the action.” That said, he realizes if he had a stronger team consisting of a smart attorneys, underwriters, and CPAs, he may not have experienced the failure he did going it alone.

[12:00] For Gino, developing a successful life is as simple as knowing what you want and why, then worrying about how to get it. “Focus on your why, and you’ll figure out your how.” [12:12] For him, that was multi-family real estate.

[13:00] Scott asks when Gino points to a failure to do legal due diligence on both his part, and his attorney’s. There were additional issues with the Board of Health and water issues in the building. He failed fire inspections and had to spend thousands upgrading his fire detection and sprinkler systems.

Lessons Learned from Gino’s Worst Deal: Due Diligence, Focus, and Recovering From Failure

[14:15] The lesson for Gino was clear: “Due diligence is the two most important words in any investing endeavor.” Scott observes that a better attorney or even a more experienced investor could have prevented many of these problems. Gino agrees that this was a deal that a smart attorney should have killed.

[15:50] Scott points out that getting an intelligent partner into the deal can be the cheapest way to have some experts on your team. Getting partners with high levels of knowledge invested in your deal can get any investor tons of free expertise, vigilance, and a safety net against bad deals.

[17:00] Keeping your eye on the ball is critical for any investment to succeed. Ultimately, Gino believes if you focus on the numbers and path toward profit, this attitude can keep you on the track to success.

[18:00] Some failures are inevitable, but having a system to do some “forensics” to evaluate what went wrong can prevent repeating your mistakes. Scott Smith advises investors: “Don’t be afraid to make mistakes, but make better mistakes along the way.” [18:40].

[19:00] Gino concurs that if you aren’t making errors, you aren’t doing much living. “The most successful people in life are those who can look at a problem through the lens of opportunity.”

[caption id="attachment_5820" align="aligncenter" width="600"] Real Estate Education: If your goals aren't juice, if you don't have passion for your goals, they're just something I wrote on a piece of paper.[/caption]

The Takeaway: Know Thyself and Have a Healthy Attitude Toward Mistakes

Scott and Gino wrap up the show by recapping the major points that other investors can learn from Gino’s story.

[20:00] The two investors agree that approaching mistakes constructively can make or break a real estate career. Similarly, they concur that excitement is a double-edged sword. It can cloud your judgment, or motivate you. This is where having a team can be useful to ensure enthusiasm is harnessed and used to motivate without distracting from good decision-making.

[21:00] Self-awareness and situational awareness can help investors approach deals intelligently, evaluate them rationally, and use previous bad deals as springboards on to better things.

Welcome back to The Real Estate Nerds Podcast! On today’s episode, we’re talking credit in plain English. Credit expert Wayne Sanford joins our host, real estate attorney Scott Smith, to share some credit tips that real estate investors--or really anyone--can actually use. Whether you’re new to credit, bouncing back from bad credit, or simply looking to improve your good credit, Wayne has tips for you. In under half an hour, you could be on your way to a better credit score. Let’s get right into it.

Techniques You Can Use To Improve Your Credit

Scott introduces Wayne, and the two experts dive right into common credit dilemmas and solutions.

[1:00] Scott asks what types of investors use Wayne’s services, and is surprised that the answer is nearly everyone: “Everyone knows credit is important, but you don’t realize how important until you need something today.” [1:44] His demographics are a combination of those with poor credit in need of credit repair and investors with good credit seeking to make it even better. Many of his clients approach him for the first time when they enter the real estate market.

[3:00] Scott asks about the most common situations that have easy fixes. The easiest situation for Wayne to address is “getting a fast 15 points.” Investors can take advantage of revolving credit (i.e. credit cards) being the single biggest factor in a credit score. Minimizing use of the credit card and keeping its balance between 10-20% of the max is superior to a balance of 0. The conventional wisdom that paying off a maxed out card monthly is actually just a popular misconception.

[4:45] New credit, or “baby credit,” applies to credit histories under 5 years old. People with new credit want to demonstrate that they’re a good risk for the lender. An average investor can call their credit card company to find out when their company reports to credit bureaus and exploit this information by timing when lenders pull information. Credit isn’t done in real-time; sometimes it’s better to wait for your credit to update before having a lender look you up.

[7:00]Wayne points out that the “Fast 15” technique is best for newer credit. Individuals with decades of good credit history may benefit more from keeping a zero balance.

[8:30] Young people or those with no credit should approach establishing credit wisely. Our guest points out that there are great credit options for college students with low limits around $500. People in this situation should maintain a low balance, while also making regular and timely payments. Once you make a late payment, it can’t be un-done.

[9:00] Scott asks about the best strategies for those in the 650-600 range who are trying to improve their credit for better financing on real estate. Wayne has a few pointers for these investors.

[9:40] Wayne offers a useful analogy for understanding credit: “Think of your credit report like a stack of cards. The messier it is, the lower the credit score.” Higher scores are “less messy,” which means it’s easier to repair poor credit but a longer process to elevate someone from 650 into the 700s.

[10:44] Most real estate lenders are concerned about the most recent two years. It still takes seven years for damaging credit information to fall off, but good recent trends are the most important for investors.

Credit Information Everyone Should Know

[11:50] Each state has its own statute of limitations on how long a creditor can sue you for. Some states like Wyoming can hold lenders accountable for 10 years, but this is on the longer side of the spectrum. The effect of judgments from creditors is massive: lenders won’t want to touch lenders in this situation at all.

[13:00] Fortunately, Wayne explains that recent changes in the law have helped those plagued with medical debt. Many of Wayne’s clients approach him because of debilitating medical debt: “God knows the medical industry is a business, and their billing department is the worst I’ve seen ever.” [13:10] Even otherwise responsible individuals who pay bills on time can be damaged by simply not receiving their bills. Professionals like Wayne can help if the creditor or collection company made an error in delivering the bill.

[15:00] Scott asks what weapons are available for those who get in a credit-related fight. Wayne shares that there are more tools available in disputes than most customers are aware of. Scott acknowledges that areas like credit and the law have professionals for a reason. Yes, you can learn the same information as experts, but it’s generally not the best expense of the average investor’s time: :“It makes sense to hire professionals to help us when there’s a steep learning curve.” [16:52]

Scam-Busting with Wayne: How To Tell if a Credit Provider is Legitimate

Not all credit repair services are created equally. Wayne offers some tips on how investors can find the best professional for them, and stay away from the scammers in the industry.

[17:10] Scott asks Wayne how customers can find a good credit professional and weed out the scammers in the field. Wayne advises that we look for professionals who ask questions. Legitimate credit professionals will want to know about your situation to ensure you’re getting what you need. He agrees with Scott’s assessment of when to hire a professional. If you’re inclined to do the work yourself, you can make a bigger mess that you will have to hire a professional to help clean up.

[19:20] Wayne also advises that credit customers go with their gut feelings. If something feels off, or you get the sense someone is reading a script just to sell you something, follow your instincts. Looking at customer reviews can also be helpful.

[21:00] The expense of a service isn’t necessarily an indicator of good or bad companies, according to Wayne. His own company offers a sliding-scale fee based on the complexity of the customer’s needs.

[22:50] When a customer’s need change, there’s another advantage to using a professional like Wayne: “When I’m looking at your credit, I don’t just look at it from the credit score perspective. I also look at it from the underwriting perspective.”

[23:00] Wayne explains his process for evaluating his clients. He always looks at credit scores for free, partially out of a belief in karma. But he also knows that being honest about whether someone needs his services can lead to future referrals.

The Takeaways: Know Your Credit Score, Use a Professional, and Watch Out for Scams

Scott and Wayne end the show with some key points investors can use to get the most out of their credit professionals, and a quick PSA on credit fact vs. fiction.

[24;50 ]Scott reminds listeners of the value of a good professional, and shares his personal approach to getting the most out of experts: “I’m a big believer in paying experts small sums of money to get great information. I find almost all experts are willing to do that...I always advocate that people use and abuse attorneys and CPAs like that.”

[26:00] Wayne leaves us with a Public Service announcement: “If it’s over seven years old, it can’t be posted on your credit. Depending on your state, usually 4-5 years after, you can’t be sued. If they’re threatening you, it’s most likely a scam.” Threats are used in these situations, but are generally empty.

Chasing the shiny thing could get you into a lot of trouble, including screwing up your IRA account. Scott Maurer, Director of Business Development for Advanta IRA, says that a lot of times, it’s somebody just getting into it and they're too trusting of individuals and not asking the right questions. For whatever reason, the common thread for people that have bungled their IRA accounts is that they are not fully understanding of what they're getting involved in and not really doing their due diligence or seeking outside assistance to really evaluate things. Scott Smith and Scott Maurer talk about all of the ways people could screw up their IRA accounts, some mistakes people could easily avoid, and the proper steps to take to avoid losing your money.

IRA Custodians: How They Can (And Can't) Help You

[1:00] Our host asks Scott Maurer to describe a deal where someone really bungled their IRA, but thought they were making an awesome investment. Scott Smith also wants to know what typically happens that makes these deals end badly.

[1:28]The mistake Scott Maurer sees over and over is that people botch IRA investments by failing to fully understand tehm and seek the appropriate kind of professional help.

[1:50] Scott Smith asks if those making major IRA mistakes simply don't use IRA accounts often, or are attempting one-time deals.

Scott Maurer remarks that that's often true, or these are investors who are too trusting of their professionals and simply not asking the right questions.

Other investors simply don't understand the risks or these investments genrally, and are lured in with promises of returns that are higher than stock market averages.

[2:38]Many of these investors are perfectly intelligent and even successful in their own fields, but simply aren't familiar with IRA accounts.

[bctt tweet="We don't do due diligence. It's up to the clients. It's written in our documents." username="RoyalLegalLaw"]

[2:58] As an Custodian at Advanta IRA,, Scott Maurer is legally barred from advising on whether a deal is good or bad for the client.

[3:08]Scott Maurer elaborates that due diligence issponsibility of the clients: "It's written in our documents and the forms they sign." IRA custodians are limited in their ability to advise, and typically refer clients to tax advisors or attorneys. However, their role is to esnure compliant documentation, not advise on investments.

[3:56] Scott Smith offers an insider secret on exploiting lawyers' lust for money: Attorneys are so hungry for business that they'll offer extremely cheap, or even free consults.

Scott has used this trick himself to get a cheap half-hour consult. This means the lawyer can review your deal and offer dirt-cheap egal advice on your situation. Attorneys do this in the hopes of getting more of your business.

Our host explains the risk of going cheap on legal advice. Getting improper, or no professional help can place the whole investment on the line. He recommends that new investors get a more seasoned investor or attorney in the field for help.

[5:03] Scott Smith expands on his tip for exploiting lawyers' need for consultations. Many attorneysare willing to go to great lengths just to get a consult.

Scott Maurer agrees and encourages his clients to get attorneys involved. While some go through with the deal regardless, others make more informed decisions or even opt of out IRA investing on their lawyer's advice.

[5:44] Even if a professional advises against an investment, it's a good idea to listen: "Sometimes, the deal that you don't do is important than the one that you did."

How An IRA Deal Went Sideways

The two Scotts discuss a real-world example of a new IRA investor making a bad deal and what exactly went wrong.

[5:59]Scott Smitth asks for a real example of how an investor botched his IRA deal, even with professionals involved.

[6:18] Scott Maurer describes a client who was promised 10-12% returns, and blindly trusted his mortgage broker's claim. The investor reasoned that with 20% down and a loan for the remaining 80% from the bank, he was sure to strike it rich. The client was new to real estate, and didn't understand equity or the terms of the loan.

[7:08] Scott Maurer explains how the investor's naivete on real estate and lack of familiarity with how real estate financing works ended up costing him.

[7:33]The client made a mistake by trusting a mortgage broker who was more interested in getting his fee than the client's success.

[caption id="attachment_5332" align="aligncenter" width="600"] IRA Account: There are people who are always willing to help and give you their opinion on a deal and they don't have a vested interest in the property. They're going to be honest with you.[/caption]

Insider Tips on Getting the Most Out of Your Attorney and Custodian

The Scotts share their professional perspectives to help investors understand, and exploit, the roles and motivations of Custodians and lawyers.

[7:59] Scott Smith gets real about the motivations for everyone else involved in the deal: cold hard cash. Custodians, lawyers, and mortgage brokers are all motivated by their paydays, but limited in what advice they can offer. The person receiving the loan is solely motivated by money, while the professionals have specific roles they are allowed to operate within. T

[8:28] Scott Maurer explains that the Custodian's hands are tied. If an investor asks whether they can lend $100,000 from their IRA, the Custodian will simply tell them they can. But legally, they are barred from saying whether that is a good idea for this particular investor.

[9:03] Scott Smith offers some insight on selecting the right attorney and the importance of finding a lawyer who is appropriate for the deal. The best choice, in his opinion, is to find a lawyer who is also investing similarly themselves: "You need somebody who's an investor in that field to tell you whether the deal itself is good."

The attorney's qualifications matter. The wrong type of attorney will simply tell you what you can do, rather than what you should do: "You really need a should. You need somebody else in there especially for your first couple of deals."

[9:25] Scott Maurer's client ultimately did get advice from a real estate attorney, he just did it too late. The client finally retained a real estate attorney because he had to foreclose on the borrower after over-lending from his IRA. When borrower walked, the IRA covered the loss, but the note was worth far less than the property.

[9:56] Ultimately the client spent substantially more on the attorney. If he'd gone upfront, he could have paid a few thousand dollars. But because the client waited, he paid thousands more to go through foreclosure and his IRA took back the property.

[10:16] Scott Smith points out the additional fees for foreclosure and the attorney's services hit the misguided client even harder in the pocketbook.

Networking to Avoid Disaster: Use Your Real Estate Investing Community Wisely

The two Scotts conclude that there's a better way to avoid this level of loss and drama: do your research upfront, hire the right attorney, and seek help from the investing community. Scott Mauer points out that you can get a lot of good advice from seasoned investors completely free.

[11:00] Scott Smith concurs, and adds that getting this advice is easy. "It's just as easy as popping into any real estate Meetup group and then just announcing in a meeting, 'I’ve got a deal. It looks like this. Is anybody here ever done a deal like this who is willing to talk to me?'"

[11:30] Networking is critical, and you have no excuse, because it's also free. Your network can save your ass well before things go bad, and can be a huge piece of your investing plan. Scott Smith puts this bluntly: "You’ve got to have a network, otherwise you're going to get taken by somebody that knows more than you. That’s just the world we live in."

[bctt tweet="If you're just getting started, there are no dumb questions and everybody in that room has been where you have before." username="RoyalLegalLaw"]

[12:00] Veteran investors also have something to gain from sharing their experiences with newer investors. Scott Smith points out that like most humans, even seasoned investors get lonely too: "They want a real estate friend. Just go and be their friend."

[12:05] Scott Maurer agrees, adding that more experienced investors attend these groups to find more deals and build their network.

[12:23] Scott Maurer offers advice for new investors: "Don't be afraid to ask questions...If you're just getting started, there are no dumb questions and everybody in that room has been where you have before."

[12:45] Scott Smith highlights another way to use the feedback of other investors. You may have a good deal if other people want in on it too.

[13:14] If you take away one piece of advice from this episode, make it this: If your professional isn't telling you if you should do the deal or not, they're not giving you advice on the deal itself. They're just doing their part. Lawyers, custodians, and CPAs are generally going to tell you what you can do, not what you should do. Get advice from someone who can answer the "should" questions.

The Takeaway: Due Diligence is All on You

The bottom line for today is to always do your own homework, and of course, get professional help. Just be sure it's the right kind of help. Thanks for tuning in to this week's Episode of the Real Estate Nerds Podcast. This was a Bad Beats episode, our series on investors who've crashed and burned in real estate and the investing game.

Welcome back to The Real Estate Nerds Podcast! On today’s Bad Beats episode, . Real estate attorney and intrepid host Scott Smith interviews fellow real estate investor Marco Santarelli. Marco is the founder of Norada Real Estate Investments, a nationwide provider of turnkey cash-flow investment properties. Since 2004, they’ve helped over 1,000 investors create wealth and passive income through real estate. Marco also shares his expertise with investors all over the country for free as the host of the popular Passive Real Estate Investing Podcast. Today, he tells Scott about one of his worst deals, and shares what investors can learn from his mistakes. After all, as us true Real Estate Nerds know, a Bad Beat is only a failure if you don’t learn from it. So that’s exactly what we’re going to do. Let’s dive right in.

Bad Deals and Good Deals All Start the Same Way

Scott introduces Marco and gets his perspective on the many ways deals can go bad. In the beginning, it can be hard to tell what you’re in for amidst all the excitement.

[1:00] Marco jumped right into real estate at 18 years old, the moment he became eligible for financing. 15 years later, he’s still in the business and helping other investors find high cash-flow properties. He’s seen great success, in part, because he’s willing to look at and learn from his mistakes as an investor.

[3:00] Both experts agree that good deals and bad deals look the same at first glance. Marco recommends a top-down approach that takes the whole picture into account, rather than remaining hyper-focused on the property itself:[4:00]“You can’t look at the property and the property only. You have to look at the macro picture...You start with the market, then work your way down to the suburb, the neighborhoods, then the property.” He suggests further analysis on the tenant, management aspects, and other details of the deal structure.

[5:30] Small errors in judgment can escalate quickly. Marco tells a wild story of trusting the wrong property manager. They had a good relationship and had worked together before, that ended abruptly when she ran off with $6,000 of his money. There were red flags he ignored because of their prior success.

[6:10] Scott points out how it can be hard to let go of a formerly trusted colleague, even if they’ve done you wrong: “It’s like a breakup, where I’m still in love with you, even though you’ve been terrible to me.”

[7:20] In retrospect, Marco realizes that he should have brought in outside property management. He’d known his runaway manager as an agent, but had never used her as a property manager. Our guest and host agree that just because a person is outstanding at one job doesn’t mean they’re qualified for another one.

Marco Santarelli on How Deals Go Wrong

Strangely enough, the $6,000 Marco lost isn’t the bad beat he came on our show to talk about. Scott and Marco dive into the dirty details of Marco’s worst deal.

[9:45] Scott asks Marco about what his worst deal was, and what circumstances led up to it. To understand what went wrong, Marco explains the context of the deal. Hhis business, Norada, helps investors with turnkey investments. His company plays an active role in “We want our investor-clients to take their “chunks” of cash and convert it into cash-flow, where you have a stream of cash Flipping business. Things started well enough, and he developed an active business that saw initial success.

[12:20] Marco’s very first deal under his new business lost him $17,700. Fortunately, his next deals covered the losses and he was making decent average profits. But the complexities of his business set-up, market issues, and operational issues with appraisers contributed to feelings of frustration and dissatisfaction.

[13:30] When Marco realized how much his business was taking him away from his true passions in life, he knew it was time for a change: “What was once a baby grew into a monster. It was sucking up more and more of my time...I’d built myself a business that was really a job.” He began scaling down and selling off his properties.

[14:34] Marco points out that the realities of flipping are stressful, time-consuming, and not nearly as easy as the media would lead new investors to believe. He cautions against getting investing advice from reality shows: “If you watch HGTV, or you watch all these flipping shows on TV, let’s face it, it’s reality TV. They’re going to show you what they want to show you that makes good TV, but it’s not as sexy or as glamorous as you see on TV.”

[15:00] While TV shows show the “wins” in flipping and make it look like easy money, Scott Smith points out that there’s actually a high level of knowledge required to be a successful flipper. Effective flippers understand markets, unexpected price increases, contractor relations, repair times, and much more. Marco agrees, and offers advice to those considering entering real estate as flippers: “If you’re going to flip property, even if it’s just one, you need to understand that nothing goes exactly as planned.” [15:30]

[17:00] While Marco started out in flipping, his Bad Beat started out as a joint venture he was persuaded to get in on. The sponsor who approached him allowed him control over the deal. The first few went well, and they quickly were earning capital in the millions. But over time as operations scaled up, this side project become more problematic and emotionally stressful. Market conditions and Marco’s lack of fulfilment drove him to shift his focus towards buy-and-holds and helping other investors.

[19:00] Appreciation has influenced Marco’s transition: “We’re in a seller’s market in virtually every part of the country, and because of that, prices are appreciating or going up faster than rents.” This created a major problem for Marco’s turn-key properties, as flipping is difficult in this climate. He was forced to diversify, as investors had lower interest in these deals and sales naturally slowed. Conservative appraisals created yet another problem.

[21:00] Tight inventory made good deals increasingly hard to find. “When you’re averaging single digit returns, that’s not enough meat on the bone to continue trying to build the business [22:40]. Under these circumstances, Marco was faced with the choice of being more selective and screening deals more carefully, or downgrading the class of properties he was buying to maintain a profit. The only alternative of moving to a different market didn’t appeal to Marco at all.

The Takeaway: Vet Your Team and Know When To Walk Away

Scott and Marco end the show by discussing their strategies for evaluating potential team members.

[23:30] Our guest highlights a truth of the investing world: “Real estate is a team sport. You never do anything by yourself.” Scott agrees, and regularly encourages his clients to have a dream team of an attorney, a CPA, and a dealmaker. Marco has prepared a team on the ground in Chicago, but hasn’t yet advanced in making purchases as he is still unloading his existing properties.

[27:00] The two investors discuss their habits for vetting a team. Scott takes new team members to hang out where he lives in the Austin area, sometimes taking members on a hike or other normal activity. This helps him get to know the other person, as their defenses drop and it allows both people to feel each other out. Marco sees the wisdom in this strategy, but acknowledges that you never really know what someone is like in a business sense until you’re already “in bed” with them. He believes the best you can do is get to know someone, do your homework on them, and look at their work and references.

[28:30] Contractors are trickier to vet, but tools like Angie’s List can help. Evaluating their past work and taking these relationships slowly can also help, in Marco’s experience.

[29:30] Scott Smith sometimes gets a work product from a team member, then has another professional come in to evaluate that product. Putting the professionals head-to-head gives Scott insight into both of their characters and their work. He notes that this strategy is particularly useful for his own kind: lawyers. This “test” can be done inexpensively, and Scott isn’t afraid to have a little fun with watching fellow lawyers face off for under $100: “It’s also just kind of entertaining to watch a cock-fight every now and then.”

[30:30] The major lesson Scott observes from Marco’s story is the value of walking away before a Bad Beat gets worse. Marco’s business wasn’t a total failure, but it simply wasn’t sustainable when scaled up under current market conditions. Marco has retained his success by sharing his knowledge and experience with new investors and being willing to diversify.

Connect With Marco Santarelli

Follow Marco Santarelli’s business activities by checking out his main website, NoradaRealEstate.com. Listeners can also check out his podcast, which has achieved a spot on the Top 20 podcasts on iTunes. Check out past and current episodes or join the community around Marco’s podcast at PassiveRealEstateInvesting.com, where Marco also hosts a wealth of free investing information and resources.

Listener Resources

Thank you for joining us on today's episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.

Don't forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today's episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week to learn how to be in the know for the best deals. Thanks for listening and joining us on our journey to become better investors!

Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions

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On the debut episode of The Real Estate Nerds Podcast, where we give the information you need to be the best investor. We take a look at the human side of investing and ask some of the most successful individuals in their fields about their best deals, bad beats, and the lessons they've learned through their experiences. Today, our host Scott Smith, an asset protection and real estate attorney, asks real estate investor Scott Sutherland about the best deal of his life.

Approaching The Real Estate Market for Hidden Opportunities

[1:00] Scott Sutherland has been investing in real estate full-time for eight years. Originally a product of the tech industry and traditional stock investing, he made his real estate debut after following investing strategists such as the Motley Fool. He credits his early success to bravery during a fearful time in the industry.

[3:35] Scott Smith points out that most in the market are brave right now. The two conclude that this is a good reason to be conservative, and skeptical of promises of absurdly high returns. The opinions of professionals matter more than the opinions of everyday investors.

[5:53] When asked what he does differently than average investors, Scott Sutherland highlights his early experience investing in Austin, TX duplexes during a market decline. He concluded that cash-flow doesn't lie, regardless of what other investors say in times of fear. He pointed out was that his worst-case scenario was still a success.

[8:17] Scott Smith comments on Scott Sutherland's tendency against following the herd: "If you say you're different, you're arrogant. But you might be different in the right way."

[10:00] While Scott Sutherland acknowledges the power of diversification, he also appreciates going with what you know: "The more you know about a given business, the more effective you can be at it." In his case, a major piece of his business is short-term rental (AirBnb). Tune in to hear the details of how his short-term rentals contribute to his larger strategy, as well as some of the nuances of this type of investing.

[15:08] Scott Sutherland always looks at the numbers when considering or analyzing investments: "Cash flow is your bird in the hand. Appreciation is the two in the bush."

[15:30] Scott Smith points out that you can only gain one piece of expertise at a time, and asks Scott Sutherland's thoughts on expanding into different asset classes.

[16:00] Scott Sutherland uses a sports analogy to describe this process in real estate: "It's still the same sport, you're just learning different shots." Having an area of expertise doesn't mean you're done learning. While Scott Smith prefers joint ventures with more experienced investors for learning new things, Scott Sutherland's personal approach is more cautious when it comes to partners and their risk. Both agree that harnessing the expertise of others is a vital element of growth as an investor.

[19:55] The two Scotts briefly debate the value of striking out on your own with new types of investments. Scott Sutherland shares his balanced approach: "There's a lot of satisfaction in knowing you could go it alone, but choose to work with others." [20:31]

[caption id="attachment_5303" align="aligncenter" width="600"] Real Estate Deals: If you don't jump out there and learn new things and go after new opportunities, then you'll never have those skills when the day comes and that opportunity arrives.[/caption]

Analyzing Scott Sutherland's Best Deal: How An Ugly Green House Got 5,000% Returns

Scott Smith probes Scott Sutherland for his unique perspective on his 2010 deal and what made it such a success.

[23:53] Our host and guest dive into the details of Scott Sutherland's big win, focusing on what Scott saw that other investors didn't. When asked what circumstances led up to his best deal, Scott Sutherland points to sheer necessity. One of his best deals happened to be one off his first, and was born out of the desire for him and his new wife to live in Austin's sought-after Zilker area. They eventually settled on a duplex that had recently been foreclosed on, planning to live in one side and rent out the other.

[25:15] One of the major lessons Scott Sutherland learned from this purchase is a piece of advice he continues to share with new investors and anyone buying a property: "If you're not the best buyer for it, particularly in a competitive market, you're not gonna get it. Or if you do, you're probably going to overpay for it." He believes this deal worked in no small part because he and his wife were a particularly good fit for the property. In general, he believes assets can be optimized for particular types of people: renters, families, developers, etc.

[28:20] The day Scott bought his property, it was dramatically underpriced. He actually chose to overpay for it by $40,000. Scott Smith acknowledges that most investors and brokers, possibly including himself, would have thought Scott Sutherland was insane for this choice. But it was the smart move to secure the asset, and has since become part of his greater strategy. He has since made multiple successful investments by offering higher than asking price, but lower than market value.

[29:30] But Scott Sutherland stands by it, based on the philosophy that "pigs get fat; hogs get slaughtered." Overpaying a little bit guaranteed he would get the asset.

[30:05] Scott Smith sees the wisdom in Sutherland's strategy: "If you want safe investments, everyone is going to agree with you. And that's great. But if you want to do something different, everyone is going to think you're wrong."

[33:00] While Scott Sutherland's primary motivation was to find an inexpensive place to live, He paid 0.55, or $1,500, down on a duplex worth $350,000. But over time, he found other ways to make the property more profitable. His low financing arrangement allowed him to close on the property and still have funds left over for re-investment. He was eventually able to rent the second unit for $1,500/month.

[36:00] Scott Sutherland's entry into vacation rentals in 2012 was inspired by a vacation he took with his wife. She observed that they could do exactly what the owners of their rental property were.

[39:00] The very next year, Scott Sutherland's next door neighbors moved out. This created an opportunity: Scott bought the property and continues to use it primarily as a vacation rental, a highly profitable choice for a location that hosts festivals such as SXSW. As for his original investment, it is currently valued at over $800,000: nearly a 5,000% return rate on his original down-payment.

What Investors Can Learn From Scott Sutherland's Duplex Win

The two Scotts end the show by analyzing the best aspects of Scott Sutherland's 2010 deal. Together, they share the major lessons they have learned from the deal itself and their broader real estate investing experiences.

[42:00] Scott Smith observes that the "magic" of this deal happened on the front-end, with Scott Sutherland seizing an opportunity others didn't even notice. The house itself was hideous when he bought it, but Scott Sutherland saw its potential and knew its location was extremely valuable. He has always liked properties that need some fixing up.

Forced Appreciation: The Beauty of Being the Scummy Neighbor

[44:00] Scott Ssutherand's penchant for visually unappealing or even beat up properties is actually part of his strategy: "Whenever you go into a neighborhood, you want to be the scourge of the neighborhood." He sees neighborhoods as an average of the homes. Given his affinity for duplexes, he is keenly aware that his neighbors' property values are likely to lift him up. Forcing the appreciation of his assets is a tactic that has been extremely lucrative.

[46:00] Scott Smith asks if Scott Sutherland has a tip for those interested in vacation rentals or short-term rentals. Check your local regulations and assume nothing. Austin, TX, for instance has regulations on short-term rentals. A real estate agent familiar with local laws can assist you. His own properties have fared well as "mid-term" rentals as a result of local regulations.

[51:00] Scott Sutherland recommends that new investors seriously consider using the same strategy he did by investing in duplexes. There are many benefits, particularly for investors who live in one unit and rent out the other. If there's a management issue, you can simply go next door. Risk is fairly low in good locations that are likely to trend well, as the income tends to off-set an investor's expenses.

[bctt tweet="If you're new to the game and you're looking to build wealth, buy a duplex and move into it yourself." username="RoyalLegalLaw"]

The Takeaway: Be Willing to Be Different and Be Smart About Risk

Scott Smith's takeaway from his guests story is this: "Know what your realistic downside risks are, and if you can afford them, take them." [56:00] If your worst-case scenario isn't that bad, it may be worth taking. If you've run the numbers and are willing to get uncomfortable, even to the point that other investors call you crazy, you too can see the opportunities that other investors don't.

Connect With Scott Sutherland

Scott Sutherland is easiest to reach via his website. He is generous with his time and enjoys offering his insights to fellow real estate investors. While his expertise lies in the Austin area, his knowledge can be applied to many markets and situations.

Listener Resources

Thank you for joining us on today's episode of the Real Estate Nerds Podcast. For even more free educational resources on real estate investing and the law, check out the Royal Legal Solutions blog. You can also reach our host Scott Smith directly, connect with him on LinkedIn, subscribe to the Royal Legal Solutions YouTube channel, or join our investor community on Facebook.

Don't forget to subscribe to stay up to date and have the most current episodes of the Real Estate Nerds Podcast directly in your listening library. Every subscription helps us create new, custom content for you. What did you think of today's episode? What would you like to hear more about in the future? Leave your thoughts and questions in the comments section below, or leave us a review in the iTunes store. We love hearing your feedback, so fire away. Join us again next week for the rest of a fascinating conversation with Scott Sutherland. Next time, Team Scott S. Squared will be breaking down the "post-mortem" of deals to look for even more lessons on becoming better investors. Thanks for listening!

Hosted by Scott Smith, Lead Attorney and Founder of Royal Legal Solutions

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About Scott Sutherland

Scott earned his Engineering degree from Texas A&M in 1995 and his MBA in Finance from Southern Methodist University in 2002. He is an active property investor specializing in distressed properties, rehabs, and buy and hold rental properties. He operates the web site www.RealtyStake.com to share his investing knowledge.

On the debut episode of The Real Estate Nerds Podcast, where we give the information you need to be the best investor. We take a look at the human side of investing and ask some of the most successful individuals in their fields about their best deals, bad beats, and the lessons they've learned through their experiences. Today, our host Scott Smith, an asset protection and real estate attorney, asks real estate investor Scott Sutherland about the best deal of his life.

Scalpel, Please: The Post-Mortem of a Duplex Sale Gone Wrong

[1:00] Scott Sutherland has been investing in real estate full-time for eight years. Originally a product of the tech industry and traditional stock investing, he made his real estate debut after following investing strategists such as the Motley Fool. He credits his early success to bravery during a fearful time in the industry.

[3:30] Scott Sutherland talks about an investment that didn't go as planned. He was limited by two things: being a passive investor and using a Self-Directed IRA for the investment. These circumstances meant he had little control over the investment beyond a certain point. Self-Directed IRA investments have additional limitations that prohibit investors from being directly involved in their investment. Doing so is known as "self-dealing" and would trigger a costly prohibited transaction.

[6:00] Scott Smith asks what made the investment in question appealing, Scott Sutherland points out that he felt comfortable with the asset class: duplexes in the Austin, TX market. Having dealt with hundreds of them over his career and feeling confident in the data, Scott Sutherland had no reason to question the asset itself.

[8:00] The two Scotts agree that Operating Agreements and deal structure matters when it comes to new assets. Even if an asset is great, the documents that dictate what happens when things go wrong can prove critical if things go South. Scott Smith drafts these for a living as a real estate attorney.

[10:20] Scott Sutherland points out that the asset he bought was four duplexes, but treated as a single property. Financing and sales issues changed dramatically because of this. Eight units would have had a lower "exit risk" than all eight taken as a whole.

[12:22] Scott Smith observes the importance of keeping deal-making processes consistent: "You can't really control what happens with an investment. That's an illusion. The only thing we can really control is the process that led us to a conclusion around what decisions we're making."

[13:00] Timing was an element in "lowering the bar" for Scott Sutherland's process. "The hardest time to invest is when things are great...Confidence peaks the day before the crash." Fear of lost opportunities, or FOMO (Fear of Missing Out), can also play a role in investors making poorer decisions in a hot market.

[18:15] Scott Sutherland notes that unstable markets yield higher returns, but the opposite was true in his case. The market was flooded. He believes he should have ignored return-chasing in favor of evaluating the relationship between risk and return for his particular deal. In retrospect, there were "ticking time-bombs" like seller-financed debt, that created higher risks from the outset.

[19:25] "If you borrow 80% of your investment and lose 20%, you've lost everything. Because you've lost all your equity."

[20:00] Scott Sutherland points out his own sense of entitlement may have played a role in his loss. He was biased by having bought properties in certain neighborhoods for higher returns in the past, and neglected to look at the present situation for the asset and market. He has since realized his judgment was impaired: "I underestimated the risk because I was very focused on the return. I was very focused on how good things would go if they went well, and not on how quickly you could lose everything if things went poorly." [21:00]

[caption id="attachment_5316" align="aligncenter" width="600"] Postmortem Of Deals: If you've got a deal where you think this sponsor is going to really be hurt financially if this deal goes down, that's a good deal to look at because they're right there with you.[/caption]

The Red Flags Were There All Along

Scott Smith speculates that a combination of external market pressures and internal biases contributed to Scott Sutherland overlooking some red flags. Since hindsight is 20/20, the pair are able to clearly see how the bad deal could have been prevented.

[23:00] Scott Sutherland actually addressed two issues with his operator planning to live in one side and rent out the other. First, he was concerned about debt refinancing if things went poorly. The operator claimed the creditor had pre-approved refinancing, and later disappeared. Scott Sutherland believes he was too trusting. He recognizes he could have taken additional steps, like calling the lender.

[25:00] The second issue Scott Sutherland identified was that a partner was acting as a contractor, but they lacked a contract clearly stating what that person would make. He attempted to persuade his fellow investors to hammer this detail out on paper: "We all need to only make money if the deal makes money." [25:13] A simple provision limiting the amount the contractor could charge would have prevented this from becoming an issue.

[26:00] Scott also adds that having sponsors in the same position as you helps: "You want [sponsors] to worry more about the performance of the asset than you. If you've got a structure where the sponsor makes money no matter what happens, that's a non-starter." A sponsor who has this concern is more motivated to make the deal successful.

[28:00] While Scott Sutherland knew and trusted his sponsor, he could never have anticipated what ultimately happened. The sponsor, who had previously been reliable, walked away from all of his investors when this deal went south.

[30:50] Poor communication with the sponsor was also a red flag: "When they want your money and they aren't getting back to you quickly, it makes you wonder how they're going to be when they have your money."

[32:50] Scott Smith points out how networking failed Scott Sutherland: "The true value of your network is in information that isn't disclosed."

Postmortem Results: What Investors Can Learn From This Bad Beat

The two Scotts evaluate what could have been differently, and ultimately see this bad deal as a lesson in risk. Scott Sutherland sums this up succinctly as: "Knowing bats 1,000." [35:10] The two investors acknowledge that money can be hard to recover, but that losses can be lessons in resilience and better judgment.