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  • Sep 09, 2020
  • Dan

My junior year of college at Notre Dame I took an internship with a wealth management group out of Orlando Florida. This company specifically managed capital for municipalities as well as pensions for fire fighters and school teachers. Each analyst that worked there weighted their stock picks differently, and based on seniority the company decided how much of their total capital they would invest in these stock picks. I found the job to be extremely boring, so mid-internship I took it upon myself to take all of their internal data and compare their 5 year trailing ROI based on their seemingly faulty “weighted” capital allocation vs just how they would have done if they had invested equal amounts in all stocks. At the time, the indexes over the previous 5 years had averaged something like 13% returns. Their fund had averaged 7.5%, and my equal weighted average model would have yielded them a 10.5% return. They would have still significantly under performed the market on the whole, but in my mind this finding would yield them a 40% higher return! I was so proud of my findings that the next day I marched into the CEO’s office to show him what I found. I was fired that afternoon, midway thru my unpaid internship. It’s hard to get fired from an unpaid internship, ugh! My take away though is that if these seemingly smart guys couldn’t out perform an index, and their sole job was to pick stocks, then it just didn’t feel or sound right.

Fast forward a year later to graduating from Notre Dame with a finance degree, I took a job as a derivatives trader in Chicago. This was the job I had dreamed of. It mirrored poker and gambling (my passions) as close as any real job could get and the potential income was incredible. The problem was, I wasn’t very good at it, but we were also trading in a historically volatile market of 2009 and I was working for a firm that leaned short volatility. But to make matters worse, the level of corruption I saw in the options market was astounding. I was what was called a market maker, which is effectively a bookie that posted a 2 sided market on every derivative of a set amount of stocks I was responsible for. The amount of times I got my markets lifted on insider trading were way too numerous to count. When I wasn’t being picked off, my “good” trades just really didn’t seem to have that much theoretical edge, and then when you added in the pick offs I lost a lot (of my company’s) money. Similar to the internship, I eventually lost my job, but I learned a lot from that specific job and it’s largely shaped the systems and methods we use in our sports betting company.

After these two jobs though, I’ve just never been very interested in investing in the stock market. I do still max out my 401k each year, but that’s more of a function of sheltering that money from Uncle Sam. I invest very boringly in an index fund and I never even look at how it’s doing.

I’ve always been fascinated with real estate though. And the thing about real estate is I’ve always felt like I could conceptually understand the baseline concept of rental properties in which you want your collected rent to be greater than your mortgage + expenses. One day back in 2017 I was out playing golf with a good friend Peter Jennings (csuram88 from DFS circles). Peter is an outstanding DFS player, but he’s also in my top 5 of sharpest minds I’ve met in our industry. Any time he tells me about investing I listen intently. Well he told me about how he had become friends with one of the founders of a site called Bigger Pockets and that it was the 2+2 forum of real estate investing. He was more excited about the concept of their website and how they were monetizing it because he felt it had a lot of parallels to what he could be doing with his site Fantasy Labs. Given I already had an interest in the concept of real estate, I went onto the site that night, and man down the rabbit hole I fell! Starting out I listened to just every podcast they had available and tried to learn some of their core concepts of real estate investing. Instantly I fell in love, and the reason being is that the math was so clear. I’m a spreadsheet geek, and using the math they were teaching me I could get lost in spreadsheets and just run a million different scenarios of how to make money off of real estate. At the end of the day though I was trying to solve one key thing:
I have a great job that produces enough income to cover my expenses, as well as max out my 401k each year. There’s a little bit extra left on top of that that I want to invest and I want to put it into an investment vehicle that can capitalize on compound interest to create a large net worth way down the road, but completely ignores spitting out present day income.

One of Bigger Pockets core investing philosophies accomplishes that problem I was trying to solve absolutely perfectly and it’s what’s called the BRRRR method.

B: Buy an undervalued property, that’s generally distressed or foreclosed. In my case I would be looking to buy this property in cash, so my ideal properties to look at were uninhabitable properties where other buyers couldn’t get financing on the property, leaving only cash buyers.
R: Rehab the property into inhabitable conditions, and in my case rehab it in the shape that would be reflective of the rent that I’m going for. More expensive expected rent calls for nicer finishes and vice versa.
R: Rent the property out after the rehab is completed. This is the easy step, if you do a good job on the rehab, people will clamor over renting out the property.
R: Refinance my cash out of the deal. So I buy the property in cash, I spent my cash to rehab the property. Well after it’s all done I need to put a mortgage on the property, which is called a cashout refi. If I’m doing the process properly my cost of buying + rehabbing will be less than the appraised value and I’ll be able to pull out as close as possible to the amount I put into the house.
R: Repeat the process. Now after creating a cash flowing appreciating asset that the tenant is paying down the debt on, I take that cash and I go look for the next deal to do this all over again.

The thing about the BRRRR method is the absolute hardest part is finding a market where homes are readily available at well under market prices that you can complete this process. For me I had an easy decision to make and that was the suburbs of Mobile Alabama.

-My wife is from a small town outside Mobile and we spend 3 months/year in this town.
-Between her and family members they know the streets of these small towns like the back of their hands, which is a big help in ensuring I would be investing in the right (safe) areas.
-Her Dad is a general contractor, and another family member is as well. They would build out the rehab teams for these properties, which contractors are a critical component.
-Home prices in Mobile Alabama are cheap compared to nation wide, but rent isn’t that cheap. A house in Las Vegas that might rent for 1,500/month and is worth 240k, will rent for 1000/month in Mobile but is only worth 80k. So you get 2/3 of the rent for 1/3 of the cost of the house. This difference is powerful when you’re plugging numbers into a spreadsheet to calculate returns.

So Fall of 2017 I started with my first property. It was an uninhabitable 3 bed/1 bath that I found on Craigslist. I purchased it for $38,500 and put $8,500 into the rehab. I secured a tenant at $850/month. And a couple months later I had it appraised at $80,000 and the bank gave me a $60,000 loan at 4.5% interest. My first BRRRR process was complete and it was a great one! All in, I had collected $13,000 net (my cost was 47k, but the bank gave me 60k), and I was left with an asset that was expected to cash flow $150/month, and the tenant will pay down the debt, and with a little bit of appreciation I’ll have a fully paid off $120,000 asset in 30 years and I’ll have collected some net cash flow along the way!

It was such a simple process and the math and the edge to be had was so easy to understand. I was hooked! Since then I’ve purchased 29 more doors (14 single family’s, a triplex, a quadplex, and an 8 unit building) with a total asset value of $5,000,000. There have been some investment deviations along the way such as:

-Owner financed properties with either a low down payment or a low interest rate, which either can make non BRRRR deals still very attractive
-Airbnb’ing out the “rent” section of the BRRRR process, which in certain towns such as beach side communities the expected rent can more than double (vs a long term tenant)
-Keeping properties in cash and not completing the refi aspect, in order to keep the overall leverage of the portfolio lower
-And my latest property I’m in the process of flipping, which I know actually goes directly against what I’m trying to accomplish but the numbers on it don’t work as a rental, but it was too good of a deal up front to not purchase

In these 3 years I’ve learned so much. I’ve made a lot of mistakes! But the good news about real estate and these strategies is that your edge is so incredibly high, that even the deals that are mistakes, they really are still pretty solid investments. In this blog post I’m giving you the clean highlight reel of this venture. The reality is investing in rental properties takes a lot of work! This isn’t like investing passively in the stock market. Every day I’m either managing contractors, managing my managers who are dealing w/ tenants, analyzing new deals, or procuring material for the rehabs. At some point I’ll outsource a lot of these duties but for now I’m still so new and have so much to learn that I still want to do it all myself before I start delegating (but I’m getting close!). The long term wealth creation I feel to be worth all of the work but the saying of “If it was easy everyone would do it” certainly holds true when it comes to investing in rental properties.

I’m going to continue to purchase more properties and am definitely still focused on the BRRRR method. My goal is to purchase 10 doors/year to add to the portfolio with an ultimate goal of reaching 100 doors. At that point I’ll start working to deleverage the portfolio with a final goal of a fully paid off portfolio of 100 doors. How cool would it be to have a completely deleveraged portfolio of 20 million in rental property assets in 30 years that are yielding $200,000/month in net cash flow! Getting there will take a lot of hard work but a fraction of the capital normally required to create that type of a retirement nest egg.

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