From Red Robin Waiter to 250 Units (Using the MLS!) with James Dainard

Brandon: Hi James, welcome to the BiggerPockets Podcast, man. Good to have you here.

James: Yeah, thanks for having me. I really appreciate it.

Brandon: Yeah, so let’s go through your story. I know you do a lot of cool stuff up there in the Seattle area. When we were hanging out at [inaudible 00:00:19]’s event there, I just kept hearing really good things about you, so I’m kind of excited to kind of dig into your story. So why don’t we go … What did you do before real estate, and then kind of walk us in that journey going from not real estate to your first deal.

James: What I did prior to real estate is I was actually going to college at University of Washington in the business school and I was actually serving burgers at Red Robin.

Brandon: Nice.

James: Kind of making tips, paying for school. My roommate at the time actually went to work for an investment company going out and knocking on people’s foreclosure doors, and so I figured as a senior in college, I needed to learn really good sales experience and the best way to do that is to go bang on people’s doors that don’t want to talk to me. So for my senior year at college, I would actually go knock doors three days a week and try to find them an opportunity to buy. They would just give me a stack of leads, I had no training on real estate whatsoever, and I would go out and knock on people’s foreclosure doors or just other kind of sellers and chat with them and try to get them to sell.

James: Honestly, I was terrible at the job the first year. I made zero dollars, but I knocked on probably-

Brandon: Balling.

James: Oh, I was just balling. I was losing my gas money every month. I’d go to Red Robin, I’d work on tips, get my tips, put it in my car, go out and knock on a door and get the door slammed in my face. Once I graduated college, I was like, “You know, I kind of like this.” Real estate really interested me. I was seeing people making a lot of money flipping houses and buying and holding properties and buying apartment buildings. So I gave it like a six-month commitment after college to work. Basically, I was working six days a week knocking doors to try to generate some deals and all of the sudden, the lights just turned on.

James: I spent a ton of time researching the market, what to do, what HUD was, what a loan was, because I had no training whatsoever. And I just kind of fell in love with it after six months, and it went from making zero money to all of the sudden, I was getting some checks for like five, six grand from this company that would pay me to find the deal, and for a senior out of college, that was a lot of money, and it just kind of got me hooked.

Brandon: So what does that look like? For those people who are listening to this and maybe saying like, “What were you saying to these people?” You were knocking on their doors, foreclosures. Can you kind of walk me through like what was the purpose? What were you doing, and then what were you saying to get them to sell you their house?

James: So the purpose was, I was working for an investment company out of Bellevue, Washington, which is a sub-market in Seattle. Their purpose was, they had a lot of investors wanting to buy rental property or flip properties and they just needed leads and so they would hire guys like me to go knock on the door and back then, it was pretty funny, because I consider I look pretty young now, I’m 35, and I looked really young at 22. And so I’d be knocking on these people’s doors and they’d like, “What are you selling?” And they’d think I would be selling newspapers or something. I would just knock on … I even had earrings in, too, so I was really young. I’d knock on the door and I would just start it off with a conversation of, “I came by to talk to you about your mortgage, and i have some people interested in buying your property.”

James: I just kept it very simple, and actually, I went out with a couple of the owners of that company and they’re pretty high energy, very sales-y guys, and that’s just not really my thing. I’m kind of more analytics and get to know people, like in restaurants, you learn how to take care of people and you learn how to serve them, and so I kind of just … I remember for the first nine months, I made no money, couldn’t get in the door, and then randomly, I talked to my mom and she said, “Well, Jimmy, just be yourself,” and literally … So I would just go out there and just talk to people, like instead of going out with a mission to go get their house, it was just more to chat with people and just have a friendly conversation, and then from there, I would get in the door and kind of talk to them about numbers on the house.

Brandon: Well, it’s amazing how so many people, especially I see this with wholesalers a lot, people who are jumping into wholesaling or even flipping, door knocking, whatever, they think that they’ve got to be like the person they heard on the podcast, or they’ve got to be somebody else because the guru they look up to or the podcaster they look up to or whatever is a certain way. So they think they’ve got to put on this act like that person, but I love that you said that, just be yourself. Your mom was 100% right. Because people can see through that fakeness all day long.

James: Yeah, so if you’re having problems, talk to your mom first. Don’t worry about the guru, talk to your mom. Yeah, and just really, just when you’re out wholesaling and you’re talking to people, it’s just getting to know them, getting to know their situation and what’s their need for selling. Sometimes sellers don’t know what their actual need is. A lot of times, when I get to a situation, it might just be that they have two, three kids and a house that’s way too small and it’s not that nice, and I kind of went in with an approach to help them get into a better living situation and by doing that, that actually … I was focused more on their solution rather than buying the house, and then that just started bringing me a ton of properties. So I created … At 23, I created this little business where I’d go out, I’d get them in credit repair, I’d line up movers, I’d find them a new rental property, and what that did, is it just got me a lot of deal flow and then from there, I started learning how to actually analyze the deals from there.

Brandon: That’s cool, so you … Sorry. Go ahead, David.

David: I was going to ask, how did you go from helping this company to doing your own first deal?

James: Yeah, so part of working there is they would basically … One out of 10 contracts, they would allow us to purchase the property. So it was kind of like an incentive for the employees, and even with my employees today, I have that same incentive. I feel like employees that are passionate about real estate want to buy real estate, so they were getting me involved. My goal at 23, I was seeing all these guys making tons of money, I was like, “I want to be that guy,” and so they gave me an option, basically on my 10th contract, I was able to start picking out the one that I wanted.

Brandon: That’s cool. I’ve never heard that before from a company, but I really love that, as well, because it gives the person who’s working for you something to look forward to. “Hey, when I do 10 deals …” That way also, it’s not like … I’ve worried in the past about hiring wholesalers or people to work with me, like what if they just go steal the first deal or second deal? Do they have a way to prevent that? And then after the 10th deal, did you get to pick any deal? Or was there a certain … It was just number 10?

James: It was after our 10th deal, I got to pick any deal that I found after that.

Brandon: Okay.

James: I still had to pay the company their fee, which that’s part of the job, and I think with them … A lot of the guys actually … It was kind of weird. I was this 23-year-old guy and then all the other sales guys were like 35, 40, and 50 years old. So I was the young guy in the group, but I was also the guy working the most. I was working like 60 hours a week, and I was doing … By after a year in, I was doing two to three times more deals than everybody else, and so they were like, “Who’s this young kid?”

James: But none of the older guys, they were focused more on the paycheck than they were about buying real estate. So besides my business partner, we were the only two guys in the company actually taking the employee option, which was kind of crazy to us, because for me, real estate’s about building wealth, not just making income, and you can do both, but at the same times, if you just rely on checks, you’re going to run out of checks at some point. My goal was not to just involved and make a bunch of checks. It was, I want to build wealth. So my first goal was to buy my own property, which happened about 11 months, or about a year into working there.

Brandon: So let’s talk about that first property. What was that?

James: It was in Burien, Washington, which is a sub-market of Seattle. It’s about five, 10 miles south of Seattle, the core area. Actually, the reason I picked it, it was a 2001 built townhome. It was townhome style, really good condition. It needed carpet and paint, and at 23, I just knew I really didn’t know how to renovate a property. That was not my skill set. My skill set was finding the deal. So I wanted to find something low maintenance, that wasn’t going to distract me from my daily duties of working, and so I found this newer building. I paid $176 for it. At the time it was worth $245. So it had that equity position that I needed, because also what I was looking for was something with at least a 20% equity position or discount, because I wanted to … At 23, I didn’t have a whole lot of money, either, so what I had to do was line up financing for a first and a second with somebody so I could refinance them out of the deal.

James: So I was looking for something that didn’t need a lot of work, that I could refinance quickly, that had a 20% equity position, and for me, I’m a firm believer if you’re a newer investor, don’t bite off more than you can chew, so it was a really good property for me to just start with, and it cash flowed me about $250 a month, too, so it was just kind of a win for me.

Brandon: Okay, so it was a rental property. How did you finance it, then? Did you say that?

James: Yeah, so how I financed it, I actually did a first mortgage with a hard money lender around town, and then I got one of our investor clients that liked me from finding him deals, what I did is, I did a really in-depth analysis of the property to make sure he knew the equity position was there, and then I got fully pre-qualified for a refinance with 100% commitment from the lender, and so I went to him and said, “Hey, can you do me a … I’ll pay you,” I paid him 12% interest and he did my second mortgage for me, and then he felt comfortable because I was all prepared, so I was in and out of the loans. I was only in hard money for two months because it didn’t need very much work. And got him refinanced and that was my first deal.

James: From there, I actually took a HELOC out on the equity to then be able to purchase my next property. So I used that 20% to get me into the next few deals from there.

Brandon: That’s cool. All right, so basically the way we talk about it today, right, is BRRRR-ing. You bought it, it didn’t sound like it needed that much of a rehab, but you bought it, rehabbed it, refinanced it, paid off the hard money lender and the private lender, which is a phenomenal strategy, by the way, and then you then … Now you own this rental property, it’s cash flowing, and because you had still equity in it, you were able to tap into that equity using a home equity line of credit and go buy something else. Did I sum that up good?

James: Yeah, and so what I did is, I didn’t want to over-finance the deal, and so the HELOC gave me that … Instead of having to get a private money lender at that point, it gave me an additional about 40 grand with bank financing to be my next down payment. Then my goal of my next purchase was to find something, very similar kind of situation with a 20% equity or more and then that I only had to put $40,000 down. So I had to find something with a purchase of less than 200 grand.

Brandon: Okay, yeah. Awesome.

James: Yeah, the leverage put me into a whole nother position. But that’s why buying that first deal is so important, to get a good equity spread because you can maximize off that and start building your portfolio.

Brandon: Yeah. Yeah, so I love that. I’m a big, big believer in buying stuff that you can build that equity right away, again. How do you balance, though, I’m curious, between somebody who’s just getting started, they’re brand new, they’re looking for their first deal, buying a deal that has tons of equity and just buying something so they get their foot in the door? If you’re talking to a new investor, how do you typically advise them? How good of a deal should they go for their first deal, and where’s that line between just getting something done?

James: What I always tell people, and this is the same thing I do myself, is what kind of capital … As an investor, I always have a certain amount of money set aside for my investing and long-term holds, whether it’s what I … For me, because I’m also a big flipper, and so I flip about 100 homes a year, and what I do is I take 30% of that profit off the flips and I allocate it for my buy and old.

Brandon: Oh, cool.

James: And so … because like we were saying, money comes and goes, and for me, if I take 30% aside, it’s going to build my wealth, not just my income. So for a newer investor, I always tell them, “Hey, the first thing you want to do is find out how much money you have to work with and then from there, build the plan off of it.” If you only have 10, 20 grand, that’s okay. You just have to start setting your plan accordingly to what you can do with that 10 thousand. When I’m talking to an investor if I only have 10 thousand I want to put to work, I might look at cheaper sub-markets out of Seattle, because you can still get a good buy and hold and get good cash flow off it and put it to work, because …

James: Sometimes just getting your first deal done is the most important thing because you get to learn your processes, you get to learn your strengths and weaknesses, and then … Just don’t buy any deal that crosses your plate that’s a big discount deal because if you’re also new, you might not have that construction background. For me, I didn’t go … I kept all with condos at first because they were easy for me to do, and then once I started flipping a lot of homes, it gave me that skill set to buy these deeper discounted properties and then get them refinanced and pull out cash and then reinvest the cash.

James: So I kind of took it in steps. My first four buy and holds were all condos and as long as they were good deals on the condo and I believed in the market and the rents were very consistent, that was a good way for me to go. Plus, as a landlord, I kind of liked that condos handle all the exterior maintenance. I didn’t want to have to deal with all the maintenance and the wear and tear, because I didn’t have the skill set to do it now. Nowadays, I don’t really buy condos because I do have that skill set, but it’s a very good starting way, or sometimes buying a newer built house is good, too, just because as you’re learning all your maintenance [crosstalk 00:14:07] kind of issues.

Brandon: Yeah, that’s a really good tip. I’ve always been nervous about condos, but then I look at them. I’ve got a buddy out here in Hawaii, his name’s Greg, and Greg buys condos up near the airport area. Not the greatest neighborhood, not the greatest complex, pretty low income, but the guy’s picking up condos for significantly cheaper than the average thing in Hawaii, and he’s making cash flow, like … I should get Greg on the show sometime, because it’s like stupid good cash flow on these properties that are like Section 8, lower end condos, but when he explains it to me, he’s like, “Look. They take care of all the exterior maintenance, they take care of the building itself, I go in,” he completely renovates these condos when he gets them, which doesn’t cost that much money, because they’re little one bedroom cement boxes, essentially, and the guy’s just making a killing off it.

Brandon: So anyway, I was always scared of condos, but I never got into them, but it can be a fantastic way to get started. Yeah, you’re probably not going to make … you’re not going to scale necessarily condos to thousands of units. Some people do, I suppose. But yeah, not a bad idea to get started.

James: Yeah, because condos do have risk. You want to make sure the HOA certs [crosstalk 00:15:13] reserves, because that can really affect your cash flow. Like one condo, I got hit with a $9000 assessment. I wasn’t really [crosstalk 00:15:20]-

Brandon: Really?

David: That’s the part no one talks about, is we all know there’s an HOA fee every month, but you can work that into your numbers. What you can’t work in is when, “Oh, a tree fell on the roof and there’s no money in our fund, so everybody’s got to kick in eight grand to pay for a new roof,” and that goes like two years of your cash flow is gone for something you couldn’t control.

James: Yeah, and that is … One thing is, the maintenance is nice because they take care of it, but then again, you also have HOA people who are not usually investors hiring out the work, and that was my biggest problem, like you guys just spent … I remember I had that assessment, it was for a fence and a roof, and they spent a ridiculous amount of money on fences and I was like, “I’m not okay with this.”

David: It’s like when the government tries to take over and [crosstalk 00:16:04].

James: Yes, exactly.

David: There’s like no motivation to do it cheaply, and you’re like, “This is seven times what I would pay for that same fence,” and they’re like, “Yeah, well. You’re not HOA.”

James: That’s funny. I can’t stand wasted budgets. It drives me nuts.

Brandon: All right, so let’s go … You mentioned a second ago something that is kind of shocking. You said, “I flip around 100 houses a year.” Is that what you said?

James: Yeah, about a hundred.

Brandon: Okay, so I want to know, how did you go from … First of all, how do you go from the guy who buys a condo and then buys a second one to “I flip 100 houses a year”? Can you walk us through in like a minute, how did you go through that transformation?

James: Yeah. I’m just a little crazy and I like to work too much, but … and I think I like to torture myself. But when we … So I got involved in real estate in 2006 and 6, and I started my business in 2008 on my own. That was right when the market just fell of a cliff. So during that time, we were starting from scratch. Back then, investors didn’t want to touch … You could just give something to someone for free and they would not want it. They’re like, “Ooh, real estate? I don’t want it.” So what I started doing is, as a wholesaler, we’d find these really good deals back then because again, even sellers were just giving away their properties, but no one wanted to buy them that much in like 2008, 9, and 10, and so what we did is, we kind of became the buyers. For us, it was about … because again, wholesaling wasn’t that profitable, either. You could get a really good deal and maybe you get five grand out of it.

James: We decided to … We got lined up with a couple different lenders to finance us, and we started with just kind of cosmetic flips where we would actually do them a little bit nicer than everything else, like add in the extra tile, the granite, and be very thrifty about how we would buy these things, and also we would factor they’d be worth 10 to 20% less by the time we were done with them. So what it did is, we started with one to two and we’re like, “Okay, we’re making 20 grand a house and this is something we can live off of,” because wholesaling was really low … Because a lot about real estate is just adapting to the market and you’ve got to put together your systems with whatever’s going on in the current market conditions.

James: For us, because no one was really buying, it allows us to get some really good deals out there, and then we just started flipping slowly and kind of building our systems and went from doing like 10 the first year and then we started doing 20, and then by the time the market started heating up in 2013 and 14, we had already started, we kind of saw the trend and we went heavy in and started doing about 40 to 50 houses at a time with a big team and then we saw all the upside and appreciation. Right now, I’m not flipping … I have been doing about 100 a year. This year, I’ll probably do 50 because I’m just trying to be more strategic with the market conditions. But yeah, it’s just hard work and no one wanted to buy it, so we just took the risk and bought it ourselves.

Brandon: That’s amazing. I love that story, because people who listen to this show, a lot of them are on their first deal, their first condo, their second, their third, their fourth. So I just like people to know, it doesn’t take 20 or 30 years to scale up to a sizable business. You just, I don’t know, put in the work, constantly learning from your mistakes, figuring out what you can do better next time, and having that vision, I guess, just kind of moves you forward, which is awesome.

Brandon: Now, you said we. Who is we? You have a partner involved in this or somewhat? Right?

James: Yeah, my partner, Will Heaton. We’ve been partners … We were actually roommates when we started in college. Or not … He’s six years older, he’s older than me. He’s six years older, but me and him were roommates when he started working at this foreclosure company. He’s been a sales guy for a long time, and then … So we’ve been partners since day one in real estate together and we haven’t shifted since. We own all our business together, we own all of our rentals together except for I do own a few of my own personal rentals that I’m always trading around, but yeah, we’re just 50/50 partners.

Brandon: That’s cool. Let’s talk about that for a minute. What made you want to partner with him? What made him a good partner, and kind of maybe relate that to people listening to the show. How can they find a good partner? Obviously, it’s been good for you guys. You’ve been blowing up. What made that so good?

James: You know, the biggest thing with … I’ve had a lot of partnerships over the years, and some have worked really well and some have not worked that well. Having a partner … My biggest thing is making sure that A, your core values are on the same page. Right? That starts with integrity, it starts with honesty, and then it also with work ethic. Everyone’s got to be on the same work ethic page. Then Will and I, we just had a passion for not just, again, going out and making checks. We wanted to build wealth, and that’s been our focus, is to … We went from, I think, probably in 2009 was the first year we bought our properties together. We started with a couple, and now we’re up to over 250 doors. That’s because me and him are on the same vision, the same line, that we want to build a long-term wealth portfolio of real estate. So as long as our core values and core investing principles stay together, then we’ve been able to be really good partners. I mean, we’ve probably had only like six major … big discrepancies in how we decide things in the last 12 years. So it’s very rare. We’re just on the same page.

Brandon: That’s cool.

David: Okay, so of these 250 doors, what are they made up of? Are they single family, multi-families, mobile home parks?

James: They’re a little bit of everything, but we have probably about 10 single family properties. For us, we hold single family properties if they have upside with zoning or some properties … Well, A, we bought them right in 2008 and they’re really cheap but they’re on very large pieces of land in some sub-markets in Seattle, so we feel like the next building boom is when we’ll probably develop those and sell those lots off or build on them, but not this building boom. Then we own, we have a lot of rooming houses where we take single family houses and we turn them into eight and 16-unit rooms, next to University of Washington, any kind of core school. We’re actually doing one where we’re doing a 60 rooming house in Capitol Hill right now, where we’re taking-

Brandon: Whoa.

James: … our building and putting 60 doors in. It’s a very complex project.

Brandon: Yeah.

James: And then we have a lot of duplexes and fourplexes, too, with … and we like things with extra zoning. You know, if they have L zoned and they can be development down the road.

Brandon: Let’s talk about this rooming house thing. This blows my mind. 60, like 60 rooms for students? Is that … That’s crazy.

James: Yeah, in Seattle, affordability is such an issue, and so we bought this historical building in Cap Hill. It’s an art house, and one of the things about Seattle is they want to preserve these kind of structures, and it was kind of like this … It was more a place for vagrants, really, but they called it the art house. So when we went to them with this proposal, we were a little worried about it because they don’t … Seattle does like to … I mean, they’ll stomp on some development because they want to keep the core neighborhood together. But the fact that we’re rolling out affordable housing, they worked with us so easy. It was so … because there’s so much demand for it, they worked with us on all different angles.

James: So these rooms, what people need is a place to live and they want a nice place, and so these rooming houses we do, we actually strip them all the way down to the studs, make them really nice, all nice kitchens, all nice flooring, solid doors, and they can live there for 999 bucks a month. So with Seattle and kind of the hipster movement, people like shared living. There’s WeWork and co-living, and they like it. So what it really does, though, it takes a normal deal and you can hyper-accelerate the return by putting the right plan together. And so that’s why we came up with these rooming houses.

Brandon: This is fascinating to me. Is there a common area? It’s almost like a giant dorm, but it’s a … but it’s not a dorm. I mean, it’s like a …

David: Is it like a hostel?

Brandon: Yeah, it’s almost like a hostel, is that kind of the feel it has?

David: That’s what it sounds like.

James: Yeah, so this one’s a little bit more complex. I’m doing another one, too, next to University of Washington where I’m taking a triplex that’s zoned SF500, but it’s grandfathered in, and I’m turning that into … Or no, it’s a duplex, excuse me, and I’m turning it into 16 rooms rather than a duplex. So with these rooming houses, what we do is we do like a really big kitchen, chef style kitchen with a big living area, flex area. Each floor usually has its own little, either a … The main floor will have a huge kitchen and then each floor has a little sub-kitchen with a washer/dryer area and then what typically we’ll do is in maybe one-third of the units, we’ll actually plumb in little small wet bars, too, for them, and those might go for like $1100 a month instead of $999, to give them a little extra space [crosstalk 00:25:07]-

Brandon: Okay.

James: But people really … Most of what we get is, a lot of them are actually, to be honest, they’re foreign students coming over, they kind of mind their own business. They want a nice, clean place to live and that’s why … We do them to like high-end, new construction quality, so they get a really good place, comfortable place to live, and people kind of mind their own business. If they have their own space, they’re good. But we do try to get in … If we have 16 rooms, we’re trying to get in like 10 bathrooms, because bathrooms are a big deal. So it’s usually like two rooms per bathroom, two to three rooms, and then some will have their own en suite bathrooms that we’ll charge a little bit more for.

Brandon: Okay. Is that … Again, this just blows my mind. I love this idea. Does the government … because it is low-income housing and they need housing for students and stuff. So they’re okay with … They work with you on this? They work with the zoning on this? Is that how that … How do you get through that? Like in the neighborhoods and all that.

James: How the zoning works in Seattle is you can put in, if you have an SF5000 property, you can actually put in eight bedrooms there. You can’t do more than eight at that point. So really, when you’re picking these, you could go get a 6000 square foot building but you’re only still going to get eight bedrooms. So there’s kind of the sweet spot with the size of the building you can get. That’s kind of … We learned that in the kind of downturn is, we were actually looking at a house next to University of Washington and it wasn’t a good enough deal for a flip and it didn’t really pencil as a rental, but we knew … It was 390, next to UW, and at the time, again, it wasn’t that good of a deal, but we saw potential. We were like, “This is 390 next to UW. This is a good buy.” So actually Will, my partner, came up with the idea and he’s like, “Hey, there’s this rooming house thing. Let me dig into this.”

James: So we took this … We paid 360 for it, we put 250 grand into the building and made it really nice. It was our first one, so we had a little bit of inefficiencies on our construction. We made it a little too nice, went a little too in depth. But that thing brings in now $9000 a month in rent. And so our cash on cash return is astronomical, whereas every other investor … and this was a property just sitting on the market. No one wanted it, and we just kept looking at it and we were like, “This is a good piece of property.” It was also next to a freeway, too, so the flippers didn’t want it, the rental people didn’t like it. It was zoned SF5000, and then since then … So we’re into it like 600 grand, brings in nine grand a month which is just a ridiculous amount for a poor neighborhood in Seattle.

James: Then since then, the zoning’s changed and now we can actually build … It got up-zoned, because when we do look at these buy and holds, we’re also looking at path of progress, what’s going on in the neighborhoods, and that’s why we liked this one. It seemed more commercial than residential. So they up-zoned it, and now we can actually build two houses in the backyard, too.

Brandon: That’s cool.

James: So if you put the right strategy together and not just overlook the just one sitting there that everyone’s overlooking, you can get something that’s a gold mine.

Brandon: Yeah. Such a good tip. There are ways … Again, real estate … I like to say this a lot. Real estate is not two-dimensional, it’s three-dimensional. A lot of people look at a deal and they’re like, “Well, they’re asking 360 or 390 or whatever, they’re asking this price. I could rent it out for this much. Doesn’t make sense,” and they move on. But you guys definitely have shown how like … You’re like, “Well, what if we did this, and what if we turned it into this? And what if we did this?” It’s like a multidimensional project, and when you start thinking that way, in real estate deals, to use a cliché, the world’s your oyster. Right? There’s a lot … Not that every deal’s going to work out, but the number of potential properties out there, it just, the sky’s the limit. There’s so much out there if you just learn to think three-dimensional like that. Now, is that something you just get over time? How did you learn to start thinking more creatively like that?

James: I think the credit actually goes to our flipping processes, because we got a lot of … Even back in the day, we would buy these small houses and carve them up into like … You know, we’d pick up a 950 square foot house and turn it into a three bedroom, two bath affordable product. So we got really used to putting together value engineered design, and then all of the sudden, we’re like, “Oh, well if we can rent these out for eight bedrooms legally, we can put our same flip process into our rentals.” Because a lot of times, people stayed clear from the major fixers in the rentals, and I don’t blame them. They’re a lot of work, you get dead time on your money. For a year, you’re out, you’re not making income.

James: But if you put the right strategy together and you have the right systems, you can really maximize out these returns, and the flipping really benefited us because we know construction and we know how to design things. We know how to get the permit pushed through and we know how to get the inspections done. So it’s been a huge … Flipping is good for income, maybe not for … I mean, it helps long-term wealth by building your capital, but it also gives you very good systems and tools. Because flipping’s not easy, so the more you learn on it, the more tools you have for your rental portfolio.

Brandon: So let’s talk about the construction stuff, because that is something that scares a lot of people. First of all, when you’re first … Not you necessarily, but when people are first getting into it, do you have any advice on how they can better estimate the costs of a rehab? When they’re brand new. How did you do it, or how do newbies can do that?

James: Yeah, construction’s really tough, because I think a lot of investors and a lot of people I work with, they do this cat and mouse game with them. They’re like, “Oh, my budget’s 100, so I’m going to tell the guy 90, and then he’s going to come at 140, and then we’re going to try to meet in the middle,” without really going through and logically breaking it down. So what I’ve done is I’ve created a spreadsheet for my whole team to use that breaks down square footages and then it breaks down install rates and material rates. The best thing an investor can do is find out what a normal install rate is per item, because a lot of people don’t even know that. Like an electrician should charge you $25 a fixture to install that fixture. That’s a pretty normal rate. On the high side, it’s $50.

James: So getting to know those things, like if I break down electrical, I know a panel is $1500 in Seattle. That’s a normal rate. A fixture’s $25. Running wires, $3 a square foot. So I get all these numbers from the electricians, compile it, and then when they give me a high bid, I then just work them backwards and say, “Oh, okay, well how much are you charging me for the panel? How much are you charging me to run wire?” You just have to really know your install rates. But the whole back and forth thing with the contractor is not a good method, because it just allows for massive amounts of change orders. So you really want to get the install rates and everything figured out, and working with a really good team that can help you with that.

Brandon: That’s great. Yeah, so … Go ahead.

David: What I love about what you just said was that you don’t just … Everybody asks, “How do you calculate rehab costs?” like it’s something that we can just say, “Well, here’s a cheat sheet. Every contractor’s going to charge the same thing.” It’s so complicated to explain to people how that works, that there is never going to be an easy way. You have to do exactly what you just said. How much is it going to cost you to do the wiring, why does it cost that much, how does a contractor look at it? Does he look at square feet, does he look at how many boxes he’s going to put in? They have a method or a metric that they use, and you’re asking the right questions so that you can understand it from their perspective.

David: I tell people that all the time, when they’re saying, “Well, how do I know what the ARV’s going to be?” Well, do you know what an appraiser’s method is when they look at a property, how they come up with what the price is? Because if you see it from an appraiser’s standpoint, you can get a really good idea what your ARV’s going to be. If you know how a contractor looks at a home, how they bid it, how they price it, you can get a really good idea.

David: You’re doing that really good, James. Everything that you’ve said is you look at a problem, “All right, I want to buy that house but it costs too much money. How could I chop it up into little pieces and rent them all out to make that work? What would I need to know in order to do that?” And you’ve just systematically broke this down into smaller pieces that then, it’s very easy for your brain to look at that problem and say, “I can make this work,” or not.

James: Yeah, and then … Yeah, I always work backwards off the issue. The other thing is, I dictate where the contractor can get their materials from, and I know that pricing. So I’m saying, “Hey, you’re going to get this floor from this supplier. It’s $1.65 for the materials, and the average install rate is $1.50 to install this.” So when they give me a high quote, I can ask them a logical question and if they can’t answer it, they’ll usually come down, or they’re just not the right guy and they don’t know how to estimate something, regardless, and so at that point, you don’t want to hire them anyways.

David: Isn’t that 100 times better than just living in fear of “I hope my contractor’s not ripping me off” or I don’t want to do this at all because a contractor might rip me off”? That’s what Brandon and I see all the time is, “Well, I don’t know. What if they’re taking advantage of me?” But what you just said is, “Well, I know the materials are $1.65 a square foot. I know the install rate’s $1.50 a square foot. So it should be a little over $3 a square foot times however many square feet I need.” And if he’s at $10 a square foot, he either doesn’t know what he’s doing or he’s dishonest and I can use someone else. There’s no fear, there’s no apprehension, there’s no worry, there’s no anxiety. It’s a very easy, quick-cut decision you can make.

James: Yeah, and you’ve really got to … I do something, I call it the bundle method, where I’ll take my whole budget and I’ll chop it into like six sections and that way, my … Like for construction, I can take my kitchen cabinets, I can just go to my kitchen cabinet company and I know exactly what they charge me for the cabinets, the counters, and the install. So I take those things away from the contractor because I don’t want their ambiguity to kind of mess up my budget. So I’ll take my whole budget and chop it into six really systematic things, like I have them do all the hard work and the planning, but the easy stuff, I’ll pull out for myself and just call my dependable subs that will give me that guaranteed price.

David: And you know, I bet if you get good at this, you could probably go to a contractor and say, “Here’s what I need. Here’s what I’ll pay you,” and you already have it broken down, and I bet you a really good percentage of contractors would actually prefer, because they’re not good at numbers. That’s not what they do. They like to build things and get sawdust in their hair. They don’t like to have to use spreadsheets and numbers, and if you could go to them and say, “Here’s what I need. Here’s what I’m going to pay you. Here’s what it’s going to cost,” and they can just look at that and say, “Oh, I’m going to make $7000. You got it,” and now you don’t have to worry about overpaying. I love … You’re the only guest I’ve ever heard that’s said that. That’s really good.

David: For the people who are out there saying, “Well, how would I ever figure out what a cabinet costs?” Or “How am I going to get these numbers?” What James did, was he went and worked for another company that was already doing this, and he built his skills serving somebody else and that was how he got started, he got knowledge, he got confidence, then he did his own thing. That’s what I’d recommend if that’s what your problem is. “Well, I don’t know how much that stuff costs.” Well, go to work for a company that’s already doing this. Go to work for a guy like James. Figure out a way to make it worth his while to hire you. That’s the fastest way you’re going to learn.

David: Now, one thing I want to know is, you’re definitely doing big things, you’re good at what you do and you’re very humble about it, by the way, which is impressive, so good on you, James.

James: Oh, thanks.

David: Tell us a little bit about where you’re finding deals, because that’s probably the number one objection that I hear from people, other than “I’m scared,” is, “There’s no deals out there.”

James: You know, I hear the same thing. People are like, “Oh, I’m going to different states,” and there’s nothing wrong with investing in different states at all. I’m a firm believe you should just invest in everything, especially … Just learn it before you invest there. I like to play in my own sandbox, which is King, Snohomish, and Pierce county. I like to be able to drive it. I know my crews, I know my systems, and I do a little bit more complex plan, so I need to have my systems prepared.

James: But everyone always asks me, “How do you get these amazing deals?” I buy them right off the market 60% of the time, and I buy them off wholesalers, I also own a wholesaling company, so we direct market to sellers, as well. But the best deals that I find are right on the market, and they’re usually misrepresented by the broker. The broker doesn’t quite know what they have going on there, or maybe it was a flipped inspection deal and the previous buyer’s inspection was so gnarly it freaked out the broker. So we’re always combing through the MLS, and I love the ones that are just sitting there on the … I mean, even my own, I just flipped my own house, basically, in Bellevue. I paid 850 for it, I just sold it for 3.1 over a two and a half year period-

Brandon: Wait, 3.1?

James: 3.1.

Brandon: Whoa.

James: And that property that I bought was on the market for 360 days before I even … and I bought it 10 grand off list. The seller wouldn’t budge, no one wanted it. Everyone thought it was a teardown, which is wasn’t, and so they were pricing that at dirt cost and I’m like, “No, this is a structure I can fix.” I mean, it was a lot of work. I put over a million dollars into it, too, so it was definitely a … It was not easy, I worked for it. My wife worked for it, too, because she dealt with [crosstalk 00:37:51]. But that … and so those deals are out there, as long as you can underwrite and look at them in the correct way.

James: We also bought an apartment building in Magnolia, which is a really good neighborhood in Seattle. It was sitting there for over 200 days. It flipped four times on the inspection. We ended up getting in contract 300 grand off list, because it was the fourth inspection, and we bought it at 3.2 cap, which is not a good cap rate. I would always tell people, don’t buy that. But then after raising rents, we got it to a 5, which is still okay, right, but that’s not my standard. But the thing that everybody missed is, we have short platted off two lots in the back and now we’re building two homes and it’s bringing our whole basis down $600, no, $950,000 off because we’re building the two homes and selling them off, and so it turned our 5.2 cap into now we’re going to be around a 9 cap in Seattle, which is amazing.

Brandon: That’s exactly what I was saying earlier about the 3D, thinking about real estate in three dimensions instead of two. This is exactly what your … That’s your magic superpower. If you were an Avenger, you’d be the 3D real estate investor.

James: Yeah. One thing you have to be careful of, though, is don’t go too crazy. We have learned getting into too big of a project, you kill your return for two years.

Brandon: Yeah.

James: You need to factor in your dead time on return, and that’s … We’ve had to learn that over the last couple years, like, “Okay, well, maybe we’re going to do it this way now,” or “We’re going to do less projects, be more efficient, and get the cap rate out.” So you can start to over-exchange, and so we kind of learned that and now we’re kind of more balanced out.

Brandon: That’s phenomenal.

David: Cory Nemoto talks about that, too. They do a lot of flipping in Hawaii, and it’s basically the economic concept of opportunity cost.

James: Yup.

David: So you can look at it and you can say, “Well, I’m going to make this much money,” but you also have to factor in well, what else could I be doing with that money during the time, what you call dead time. That’s a really good point, and sometimes when you want to get a deal or you want to brag to your friends about what you did, you can make those decisions without thinking about, “Well, what if I could’ve turned that money over four times on flips where maybe I made half as much money, but if you did it four times during that period, you would’ve made twice as much in the end?” So that’s a very good point you’re bringing up, unless you can get access to other capital so that while your capital’s tied up, you can still do deals with someone else’s.

James: Yeah, and finding deals on the MLS is really looking for that broker that doesn’t know what they’re selling but also looking for that next market that’s still depreciated, that path of progress. So those condos I bought, originally I ended up 1031 exchanging those into a house in Suncadia, Washington, which is kind of like a resort town, because I saw my condos go way up in value and I’m like, “Okay, these things are at the peak of a market. I need to sell that and maximize my equity,” and I 1031 exchanged it into a vacation rental, which was totally random, but it brought in … They were renting for $1100 a night, and then I liked that for upside because I was buying it below replacement cost. They spent $400 a foot building these houses and I was buying at $270 a foot, and so I saw the runway there.

James: So it’s … buying and hold’s not just about your income that you collect. It’s about placing your money in markets for a couple years and then repositioning it when the market starts cooling down, because that’s how you can hyper-accelerate your appreciation and your return by buying it so you’re always increasing your cash flow but also increasing your equity position, the whole BRRRR method, and then taking that equity and putting that equity to use.

Brandon: So you’re not a “I’m going to buy it, hold it for the next 50 years.” You’re always looking, “How do I get a better return on my equity that’s there?”

James: That’s … In this kind of market, I think we … I personally think I have to be, because right now, markets, in Seattle, there’s a lot of things at peak pricing, in my opinion. I look at okay, what’s the upside? Am I going to get that much more in rent? The asset maybe has appreciated 25%, and then if I really like the building and it’s just turnkey and I don’t want to mess with it, then we’ll leave it alone, but … Or I’ll then … I want to always increase my position. Being an investor is my full-time job, so if it just takes me a little bit more work than to roll it over, I’ll switch it over there.

James: Even the Suncadia property, when I bought that, I was like, “Oh, I’m going to keep this forever. I love it, I get a vacation there,” and then it went up 350 grand in value, and I’m like, “Well, that’s now going to go down,” because then I also saw a record number of building permits pulled there. And so I’m not only just looking at my asset, I’m looking at what’s going on around my asset. So if I’m seeing a bunch of building permits pulled around one of my assets, that means that there’s going to be an oversupply, which is going to bring my value down, which also could bring my rent income down, and so then I ended up selling that and going back into a traditional investment from there. But usually, I keep them for minimum two years.

James: There’s some, in me and Will’s portfolio, there’s property, like that 60-room rooming house, we’re going to keep that, because that’s a lot of work and it’s a high income, and that’s just going to be a staple property for us. But other ones, I’ll always … If I can increase my position, I’m always going to increase my position, because I’m not retired yet, so that’s my job, is to always increase my investment position.

David: Well, I talk about that in Long-Distance Real Estate Investing, that return on equity is a metric you need to learn and understand, because when you bought the property, let’s say you were getting a 10% return and rents have gone up and now you’re getting a 15% return, and it’s easy to say, “Wow, I’m crushing it. I’m doing so good,” but your property has increased in value so much that the return on your equity is 1 or 2%, and if you were to reinvest that money, you were getting a 3% return, now you’re getting a 15% return on something new, you’ve 5Xed your cash flow and you have the value added opportunity that comes from buying a new property and turning it around. I’m sure you would say, James, from the deals you’re doing, the money that you make, the equity that you build, comes primarily from buying underperforming assets and fixing them up, making them worth more. It’s that initial “I bought it cheap, I fixed it up” where most of your wealth comes from, and then the rest is where we just let it go and the cash flow comes in.

David: But make sure your equity is working for you. Look how hard you’re working at what you’re doing. You can’t let your money not work when you’re working this hard, and you understand that and that’s exactly why you’re building wealth so fast, is you’re buying it, you’re making it worth a whole lot more, and then you’re saying, “Well, is this equity better spent sitting in this property? Or can I get more somewhere else?” and then moving it to a new asset class. You combine that with everything you know about real estate, zoning laws, how to buy deals off the MLS, making a hostel, all the stuff you’re talking about, and you’re going to accelerate your returns quite a bit.

James: Yeah, and it really just comes down to timing, too. Because right now, the market’s still appreciating in a lot of neighborhoods, especially in Washington, and so for me, I’ll probably stop exchanging as much once the market kind of flatlines out. The other thing I pay attention to when I’m trading around is bank rates are really low right now, so it’s easy for me to trade around. But once rates creep up, which they will eventually, then it doesn’t make it as worth your while to trade around a property because now you’re also trading … you may be trading into a better discounted asset, but your bank financing could be two points higher.

James: So there’s all these things outside the box that you’ve got to pay attention to. For me, the last five years, I’ve seen what’s going on in the market, so I’ve been doing all my trades. But at the end of the day, when everything stops and I’m going to settle down, I’ll be locked in with low rates and I’ll always increase my equity and cash flow position. So if I can’t get a low rate and I’m not increasing my cash flow position, then I’m not going to sell that asset.

David: Once you’ve got a rooming house with 60 doors and you’ve a total of 250 doors in your portfolio, and a lot of that is not just an individual house that one property manager’s doing, it’s a property with a whole bunch of doors in it, how are you structured to collect those rents, make sure your bookkeeping gets done? I’m sure you’re not making sure all 60 rooms are full in your rooming house. How have you delegated that responsibility to other people?

James: We used to use property managers, and property managers are a good way to go. They can cost quite a bit. Once you get to a certain portfolio … We actually have full-time leasing people on our staff now, and so we just have it all in-house, accounting’s all done in-house. We use a Yardi system for collecting rents. So it just really comes to down to … You always want to analyze your portfolio, what your expense is, and property management, usually we can get it for about 5 to 6% locally, if you’re giving them a lot of business. So we run our 5 to 6% cost and then at that point, it’s half the price to have two full-time salary people, and in addition to, we also can control the maintenance cost, because we want to do our own maintenance because we’re thrifty. Bad … Or not bad property management-

David: Lazy property managers that send the first handyman they find that charges three times what your guy would pay, yeah, that’s your biggest expense with single family housing.

James: Yeah, that’s how I pull my hair out. I’m like, “You just spent how much on a toilet?” I just can’t … I still have that cheap side to me, where I’m like, “No. I’m not paying that.” So but yeah, just putting together the right systems, and that’s where you have to look at your portfolio and go, “Okay, well how much time do I have?” If I’m a Microsoft guy, I’m probably still going to use property management because I’m not a full-time investor at that point. And so for me, being a full-time investor is my business, so we had to hire and staff accordingly.

Brandon: Yeah, that makes a lot of sense, and a lot of real estate, what I’ve found is if you can get to that certain level, there is that level, like at 20 units, it might not be worth it, you can’t hire … I mean, it’s not worth it to hire someone in-house to run that. At 30 units, it might not be worth it. You’re still doing it yourself. But there gets to be this point, maybe it’s at 100 units, maybe at 200, where you can bring that in-house and then lower all your costs. It’s almost like … I’m looking at this with mobile home parks right now and with apartment complexes. What number do I need to get to where everything becomes cheaper at that point because of the economies of scale? I’m not saying I’m going to go out and buy bad deals, but what I can look forward to is hey, I can drop that property management cost from 7% down to 3% once I get over 200 units, because then I’m going to bring it all in-house, or something. It’s just another interesting way to look at kind of a three dimensional deal.

James: Yeah, and you always just want to perfect your return, especially if you’re in a stabilization period where you’re like, Okay, I’m making 10%. Can I get it to 11 by doing nothing? Or by changing things, not doing nothing, but changing things around?”

Brandon: Yeah, definitely. Well hey, I want to move us along to the next segment of the show, and dive deeper into one of your particular deals. So it’s time for the Deal Deep Dive. Hey, so James, I’m pausing real quick here. This is the part of the show where we … I don’t know, did we talk to you about this at all? We’re going to go … We just basically want to go into one of your deals, so any deal that you’ve recently done. We’re just going to ask you where you found it, how much you paid for it, what you sold it for if it was a flip or what do you rent it for.

James: [inaudible 00:48:53].

Brandon: Okay, I didn’t want to spring that on you, but that’s why we’re pausing real quick here.

James: Yeah, so I just bought one that I’m in the process of, where it’s actually, I bought three houses next to each other and then also had a ADU and a garage in the back, and so I short platted around it and kept the ADU, the house, and the garage, and then I’m selling-

Brandon: Yeah, that’s a perfect one. Yeah, that’s perfect. All right.

James: Definitely not a good deal on paper when I bought it.

Brandon: All right, let’s talk about that one. Okay, we’ll start again. Give it a second of silence so Dave can see the … All right, the Deal Deep Dive. This is the part of the show where we dive deep into one deal that you’ve done and ask a series of questions about it. So let’s see, you got a property in mind, then? Before I ask the questions.

James: Yeah. Yeah, yeah, yeah. I’ve got one I just closed on and about ready to list one of them, too. It’s kind of a flip/rental pseudo.

Brandon: Ooh. Perfect. All right, well that’s the first question. What kind of property is this? Is it multifamily, single family? And then where is it?

James: So it’s in Olympic Hills in Seattle, Washington, which is about 10 miles north of downtown. So it’s a good transitional neighborhood, borders with Shoreline. It’s actually a single family purchase, where I purchased three single family houses and then it also had a detached thousand square foot ADU in the back and a detached three car garage in the back, as well.

Brandon: Okay. Wow.

James: Yeah, it was a deal I bought off a builder that needed the cash.

Brandon: So three single family houses and a thousand square foot ADU, like an extra unit. So it’s almost like four houses but not really, right?

James: Yeah, four … The ADU is bootlegged into one of them, but yes. Basically three and a half houses and a big, big garage.

Brandon: All right.

James: Yeah, it’s good for toys.

Brandon: That’s awesome.

David: You said you found it from a builder. Can you tell us a little bit about that?

James: One good thing about buying properties in Seattle for so long is people kind of know us, that if we give them our word, we’re going to close on it. So there was a builder, a lot of people are doing, like we’ve been talking about, 1031 exchanging, and the builder kind of got caught and needed to sell off some properties. But he’s also a very experienced guy, he wasn’t going to give them away. So we came to terms and I ended up buying these properties, it was a combined purchase of $1.56 million for three houses, and he had been shopping it, actually, for like 60 days before he found me to buy it. The reason being is a lot of people just said no because on a cap rate basis, they were rentals for him, it was like a four cap on houses in Seattle, which isn’t very good, and then the equity position, I paid basically 540 per house and they’re worth 699 to 750, so there wasn’t that big of a discount for a flip, either.

James: So when he ran it by me, I originally was like, “No, I’m not really into this,” but I went and drove it and took a look at it, and I was like, “Oh, okay. I think I can come up with a plan here,” because partially what he did, too, is he built three houses, built that ADU in the back, built a garage in the back, and they’re all crossed all over property lines. So the house had the garage, but you couldn’t get to it, and it was just kind of a mess. So what I kind of dug into, I was like, “Well, I really like this property with the ADU and the garage, because it will rent out … that front house will rent out for $3500, the ADU will rent out for about $1900, and then I can rent the garage out for $100 per bay.” So there was a combined rent of around $6000 a month on this property. But the rest of the properties were kind of these dragdowns, and then even at the purchase of 550 and the renovations, I’m like, “This still isn’t that good of a cap rate.”

James: So what I ended up doing was looking at two of the properties and running the flip numbers on them, and because they were pretty cosmetic, what I’m in the process of doing, I’m listing one this week, is selling off two of the properties. I short platted them, boundary line adjusted everything around to where the one property now had all, it had the house, the ADU, and the garage, and I’m flipping the two houses to take my basis down on that property. By flipping the two houses, I’m actually generating about 110 in income there, which is going to take my 550 purchase on that one building and it brings it down to 440, which ends up being a payment of $2400 a month, taxes and insurance included, which is now going to bring me in six grand a month in income, so after-

Brandon: That’s awesome.

James: I have no money in the deal. Once I’m done flipping them, I’ll have no money in the deal and generating about $2500 to three grand a month, plus I get to stick all my crap in the garage.

Brandon: That’s amazing.

James: [crosstalk 00:53:32].

Brandon: So okay, let me dive in a little bit. I was going to ask, did you just pay what he wanted, the 1.56, is that what he ended up coming at? Or did you negotiate him down-

James: Well first I was going to tell him 500 a house, and then I drove it and kind of looked at it, and I was like, “Oh no, I can pay this,” and then I wanted to realize it before someone else realized what they could do with it. You know?

Brandon: Yeah.

James: I think everyone kind of blew by it, because there’s houses right by that for sale for 575 [inaudible 00:53:59]. So it didn’t look like there was a lot of discount on the houses. So for me, I wanted to kind of … and naturally, I always like to grind people down, but at the same time, I don’t want to lose a good deal, and if I can make an extra two grand a month and get storage for free, I mean, I’m going to, I’d be kicking myself a year down the road. The other thing that also passed while I was in contract on this is that new ADU rule in the back, to where now I can actually condo off that back house if I ever want to, and so now the combined value is worth like over a million and I’m only going to owe 450 on it.

Brandon: Oh, I didn’t know Seattle had that. I know we have it out here in Hawaii, where you can condo out your ADU and separate it. I didn’t know Seattle has that. That’s cool.

James: It’s been around for a while. There’s a trick to it, so maybe I’ll … I can explain the trick to you later.

Brandon: Sure. That’s cool.

James: About going through the county. But so at first, I was like, “No, I’m not really into this.” I didn’t really like the street. It was surrounded by apartment buildings, so I was like, “Eh, the upside of the houses aren’t really there.” But then once I did all the math on it, I was like, “Oh no, this is going to work,” and so I was paying him a little bit more of a premium on it, how I look at it. So because I was paying him a premium, I got cheaper financing lined up right away. He let me conventionally finance them all, so it saved me all my hard money and debt cost. And that was my thing to him, he wanted cash and I said, “Well hey, I’m going to pay you what you want, but you’ve got to give me 40 days to close these.” And by doing that, it saved me about 60 grand in hard money cost on there. Just by getting the … I gave him what he wanted. Instead of chasing, trying to get him down 60 grand, I just gave him what he wanted and financed the deal in a different way.

Brandon: That’s awesome.

David: So how did … Explain how you financed it, how you funded it.

James: I funded it with … I actually really like working with credit unions and local banks, especially once you have more than eight properties financed in your name. As an investor, I’m a firm believer you should go meet with all those people, get them comfortable with your processes, and once you get that, you can actually get pretty good financing done quickly and very … I mean, it’s not very hard. My books are very complex, it’s a lot of different companies feeding into each other with a lot of different write offs, and so it’s a … I’m a mortgage guy’s worst nightmare when it comes to on paper. But they … I worked with Alaska Credit Union on these ones. They were quick, they were fast, and because of the plan, I explained to them my plan, too, and what I was doing, and so I was able to just put 10% down on all those properties as well, which usually you’ve got to put 20% down. But after I showed them the income potential and what my plan was, they actually got it down to 10% for me.

Brandon: That’s awesome. That’s just another reason why yeah, getting to know those local community banks, credit unions, really, really smart idea, instead of just going to the big national banks.

James: Yeah, big national banks, they have different people making the calls, and they don’t know us. So I’ve always had more luck with local banks

Brandon: Yeah, that makes a lot of sense. All right, what about like … at the end of the day, you got it with 10% down, but are you going to refinance out now once you sell off those two properties? Is that the plan? Or how does that work from a title standpoint?

James: I got a really good rate on the one, and so what I’m doing is the two flips are going to generate me about 120 grand in cash [crosstalk 00:57:20], and so after taxes, it actually comes down to 80 grand, which is the down payment for the one … So honestly, at the end of the day, I’m plus $30,000 in my pocket and I’m walking with two grand a month in cash flow.

Brandon: That’s awesome.

James: And I locked in a really, it was … because rates dropped at that time. I think I’m at like 4.65 on a 30-year fixed rate, because this one I do plan on keeping for a while, because I … well A, I need the garage, so it fits really well for my construction company, I can put tons of stuff in and rent it out. But for now, I plan on keeping this one for a while. But after everything … and that’s when I really realized it was a really good deal, because I could flip the other two houses, basically get all my down payment back plus 20 grand and collect two grand a month.

Brandon: That’s so cool. That’s amazing. So what … I’ll take the last question, unless David, you want it. Lessons learned? All right, what’s the lessons learned? What have you learned on this project that you can share or that made an impact on you?

James: The biggest lesson I learned on this was actually when I did my first … So when I was purchasing the property, part of it was I was going to do all the easements to get rid of the title issues with the buildings on different property lines. Originally what I did is I just went in and did easements and recorded easement for access. That cost me like three grand to do, three to four grand, had to survey it out. Got it all done, closed on the deal, and I was about ready to list the property three weeks ago, one of them, to get my cash back, and I screwed up. I didn’t think about my plan of possibly condo-ing off the house down the road, because to do it that way, I can’t do it with the easement I recorded and I need to do a boundary line adjustment.

James: So I kind of … My first plan was too rushed, and so now what I had to do was un-record the easement, go in for the boundary line adjustment, and what it’s done is it’s made me sit on the middle house that I’m selling for another month, which is a loss of three grand at that point. But it would’ve been a lot more detrimental, actually, if I didn’t do it and I sold the house and then I couldn’t condo it later, because it’s kind of specific rules.

James: So making sure … Sometimes speed isn’t your best friend, right? Don’t rush into that project and just try to get things done. Because my goal was to get that one flipped in 45 days, get my money back, and then move on to the next deal, and I should’ve slowed it down because it probably would’ve saved me six, seven grand at the end of the day. That’s kind of wasted money, plus it was just sitting there.

Brandon: Wow. That was a phenomenal story, though. Very, very cool, and yeah, good luck on that project. I’m curious of-

James: Yeah.

Brandon: Yeah, that’s so cool. I love … Again, it’s just over and over and over, this theme today just keeps coming up of just finding different, creative ways, not necessarily to finance a deal, even though that was creative, as well, but to put together something that might not be a deal and how to turn it into a deal. We just keep coming back to that, and I love that. That’s your superpower. So yeah, keep that up.

James: We call it inventing returns, like yeah, you can’t get a cap rate of … you get a four and a half to five cap in Seattle. We’re not okay with that, but we like the area, so we need to invent our own returns to get it to meet our minimum standards.

Brandon: Yeah. It’s like David and I always talk about, how today’s market, you don’t really find good deals anymore. It’s not 2012 or 2011 anymore. Today, you make good deals. You make them by being creative, and that’s exactly what you’ve done. So very, very cool. Well, before we get out of here, let’s go to the next segment of the show. It’s time for our Fire Round.

Brandon: All right, time for the world famous Fire Round. Of course, these questions come direct out of the BiggerPockets forums, which you can visit, everybody can go hang out there at biggerpockets.com/forums. Totally free. So let’s do it. Some people got to ask some questions of James here. Number one, Hector from Overland Park, Kansas, said, “I’ve got no cash, but I do have an investor willing to fund my first flip. What do I get out of it? What does he get out of it? What’s the best way to approach him and form a relationship that can continue into the future?” What advice have you got for Hector?

James: Well, Hector, just like I did my first one, instead of bringing in an equity partner, I just paid him like a lender, because for me, it was about getting that first deal in my name. So you find that really good deal and what you want to do is you want to … Or what I did, is I went to my investor with a plan of, “Hey, I’m going to buy this. You’re going to do my second for me. I’m going to pay you this return,” and sometimes it makes more sense to overpay that person on the return to get the deal in your name, and then get set up to get him taken out with a plan … Give him the plan to get your money back, and then so just pay a little bit more for your financing rather than giving up equity on your first rental. That’s just where I came from, I wanted to start building my own portfolio, but I offered to give him better loan terms and a safe loan rather than giving him equity in the deal.

Brandon: All right. Okay, cool.

David: All right, question number two. “I love hearing success stories on the podcast, but I’m wondering if you can share a deal gone wrong? Why did it fail? Bad location? Did you overpay? Bad property management? Et cetera.”

James: I have more bad deal … I have tons and tons of bad deal stories. You have to be … That’s how you learn in investing. Well, I guess going back when I was new, biggest mistake I made was jumping from buying condos to buying a really big fixer house in the middle of nowhere, and I had no systems for construction. I had only done carpet, paint, but it was this amazing deal, I was paying like 40 cents on the dollar for, and I just got smoked on this. Time and materials, it went six months over timeline and then during that six months, 2008 happened and the market crashed, and so I was three times the amount of budget, three times over the timeline, lost all my cash, and that’s because I was buying what I didn’t know how to buy. So as an investor, I won’t buy unless I have a process somewhat figured out for it, because that’s how you can really get your butt kicked.

James: I also, same time, I bought a commercial building during that time, which I don’t buy commercial office space, is what I learned. I learned that because we bought a really cheap building in a not that good location, but it was this amazing, we were paying like $100 a square foot for this office building. But it doesn’t matter if no one wants to rent it in a bad location. So it sat vacant, and we actually had to move our whole business down there when the market crashed and occupy it, and then get it leased up, and that’s actually how we learned condo-ing things off. We condo-ed out little sections and leased it up and then moved out. But it always comes down to not buying the right deal, or buying what you don’t know.

Brandon: I had a mentor tell me early on in my career, very, very early, said, “You can go broke buying good deals.”

James: Yes.

Brandon: I didn’t totally understand what he meant back then, but I completely understand it today.

James: Yup.

Brandon: Yeah, just because it’s cheap or just because you think it’s a good deal doesn’t mean you should buy it. Number three, Adam from Roxbury, Connecticut said, “My tenant wants to put in a ceiling fan in the unit he’s renting. He said he would buy the fan and his brother, who is an electrician, would do all the wiring and install it for free. Should I allow him to do that? Or any advice on how I should go about this?”

James: Personally, I wouldn’t mind if a tenant improved mine, but I also want to make sure, it’s my building, that they get a permit and it’s inspected. You don’t want the liability of that thing possibly catching on fire because he had his brother do it. Personally, I don’t really talk to my tenants because I’m a softie, and so I’ll just usually approve it, so they go through … Usually my property management team will say no, and then if they ask me, I’ll probably say yes, but get a permit.

David: You sound eerily like my best friend in real estate.

Brandon: Are you talking about me?

David: Yeah.

Brandon: Yeah, I can’t … Tenants can’t ask me things, because I will always say yes, because I’m a softie, as well. So I created systems of people who say no for me, so I don’t have to.

David: It’s insulation. That’s exactly what you need.

James: Yeah, I’ve lost lots of rent because I let people slide, because their mom or whatever it is, and it hurts.

Brandon: Me too.

David: All right, next question. From Mike Nelson in Miami, “Does anyone have any tips to get hard money lenders to fund your deals? A little about me, I have a background in construction and I’ve done one flip, which was a big success. I also know a couple of good listing agents. Thank you.”

James: For me, getting my first capital was really just A … So I got my first loan through a local lender. They just wanted 20% down, and so for me, it was really finding the 20% down was the harder part, and so I just had to make sure every property that I presented that person with had a really detailed out plan, not just construction, but I covered all different angles, like, “Hey, if I’m going to flip this property, here’s my backup plan in case this doesn’t flip. I’m fully pre-qualified, I can get a loan for this amount.” I always wanted to give them a really good exit strategy on it.

James: If you’re doing a flip, one other thing you can do that’s worked well for me, especially in the beginning, was bringing in an equity lender at that point. That’s where I will bring in an equity lender, just to build my track record, because I really wanted to have 10 to 20 deals under my plate so we could kind of get it ramped up, but I didn’t have the 20% down for all these deals, and so it was I would give him way more equity in the first couple because then they saw it was a little bit less risky and then they wanted to be involved again, and I actually gave him less equity as time went on. So it went from going 50% to 25% to then just borrowing money at that point.

James: And then as a first-time flipper, the most important thing I can tell you is don’t spend your profits. Save your profit. It’s really easy to get your first check and just blow it. Save it, because then you don’t have to bring in those equity partners. It saves you so much money down the road.

Brandon: That’s terrific advice. Really, really good. Yeah, I know a lot of people when they flip a house … My very first flip I ever did, I took the money and I paid for my wedding, which wasn’t a bad use of the money, but I didn’t have anything after that. I was like, “Well, that went … Now that’s gone, and now I’m broke,” and so like-

James: Did you feel like a princess for the day, though?

Brandon: I did. I felt like a princess for the day.

James: That’s all that matters.

Brandon: It was all worth it. It was all worth it. All right, that was great. Great answers of the Fire Round, and now, let’s get to the last segment of the show. It’s time for our Famous Four.

David: Famous Four.

Brandon: All right, these are the same four questions we ask every guest every week here on the podcast. But before we ask James those questions, let’s hear what’s going on this week over on the BiggerPockets business podcast. But before we get there, let’s hear what’s going on this week over on the BiggerPockets Money Podcast. Dave [inaudible 01:08:00] you can pick the ones you want.

Brandon: All right, here we go. All right, let’s get to the Famous Four. Number one, James, do you have a favorite real estate-related book?

James: You know what, my favorite book that anyone’s ever given me, and it’s not that real estate … It’s How Not to be a D*ck.

Brandon: That’s a book?

James: That’s a book. I’ve got it in my drawer right here.

Brandon: That’s funny.

James: My employee gave it to me, because she said it was [crosstalk 01:08:27]-

David: Brandon’s going to send me that now.

James: It’s a good book.

Brandon: Yeah, I’m going to send everyone that. Yeah.

James: You know, I started with Rich Dad, Poor Dad way back in the day. It was just … It was the first book that someone gave me when I was 21, and most of the reading I do is actually more economics now and conditions than actual like strategy, because my strategy is based on market conditions than anything else.

David: It sounds like that book might be the 2019 version of How to Win Friends and Influence People.

James: Do you have that one? We can trade. I’ll trade it out.

David: [crosstalk 01:09:02] books with-

Brandon: [crosstalk 01:09:02] name.

David: Yeah, there’s more and more new books with the really, titles that are just-

Brandon: Yeah, there’s like a dozen books with the F word in the bookstores right now.

David: Yeah, the Subtle Art of Not Giving a F.

Brandon: Yeah, that was the first one, I think, and now there’s like a dozen of them. I see it every time I go to any bookstore. Yeah.

David: I thought they were joke books, but they’re actually real published actual edited legit books that sell a lot of copies.

Brandon: The Subtle Art was actually a fantastic book.

David: See? I never would’ve thought so. I would’ve thought it’s like a bachelor gift or something.

Brandon: That’s funny.

James: What is it? The Subtle Art?

Brandon: Yeah, it’s called The Subtle Art of Not Giving an F, and then they block out the F word.

James: I like it.

David: It’ll make a great complement to the book you just mentioned, James. We need to get it.

James: We can start a book club.

David: All right, I’m still having trouble concentrating because I’m picturing Brandon in a wedding dress at his wedding, all six foot five of him, bearded up, looking perfect and-

Brandon: I only had a goatee at the time, so it’s okay. It was goatee Brandon, not beardy Brandon.

David: Poor Heather. That woman is an angel.

Brandon: She is.

David: All right, next question. What is your favorite business book?

James: Ooh. My favorite business book. I should’ve …

Brandon: You could put Rich Dad, Poor Dad if you want.

James: My favorite business book that I read, and I still, it was actually called The Sales Bible. As a young salesperson, I really wanted to learn on how to handle objections because I was trying to negotiate a good … It all starts with a good deal. Right? So that helped me organize all my, how I did sales, my followup methods, because following up is the biggest part of sales, and it taught you how to do objections, followup method, and it just, I remember, I read that book like five times in my first year because I was getting nowhere, and it just kept kind of helping me through.

David: That’s a nugget, because followup is where it’s at. People, they don’t realize that. They send one round of direct mail letters and they don’t get a reply and they’re like, “That didn’t work.” I had a new agent on my team that went door knocking the other day and she’s like, “I’ve been door knocking twice in a row and I haven’t found one person to sell their house.” It’s like, what are the odds that the moment you knock on their door, they’re going to have been, “Oh, actually, I do want to sell”? You have to keep doing it. That’s the whole point is, you get a relationship, you build, and then eventually, that starts to feed you. But I see so many people that start off on that journey of lead generation, looking for leads, and then they only hit somebody once. It’s like, you’re looking for a tree that will fall down with one swing of the ax. That’s what you’re looking for. You have to keep chopping at it and eventually, it will go down. So that’s [inaudible 01:11:28].

James: I used to knock 30 doors a day, five days a week. That was my minimum.

Brandon: Wow.

David: But how many … I bet a lot of those deals did not come from the one door. They were consistently talking to the same people and letting them know you were there and saying, “Hey, I want to buy your house.” Right?

James: Yeah, and then just … Yeah, you mark the hot leads, you’d be like, “Oh, this one’s beat up, this one’s neglected,” and then those ones, I would go back to weekly.

David: You make it a funnel.

James: Yeah, and you bring them gifts. You can bring them all sort … Whatever thing they liked, I was going to bring them. Whether it was a beer or cigarettes or food or whatever it was, I would drop by and bring it to them.

David: I think we need to have you write a book, man. This is some really, really good stuff.

Brandon: This is awesome.

David: Yeah, How to Buy Real Estate Without Being a Beep. All right, next question. What are some of your hobbies?

James: I’m a big … So I like boating a lot. I can spend a lot of time out on the water. My kids are top priority for me, so anything kid related on the weekends. I love hanging out with my kids. And then I’m just kind of a fitness person in general. I’m a firm believer if my body feels good, my mind works better. So anything active, like if it’s wakeboarding or working out. Like I said, I’m relocating to California a little bit just to be out in the sun while I’m surfing. Just anything active.

Brandon: That’s awesome.

James: And Seahawks football. I’m a huge Seahawk football fan.

Brandon: So are you going to change when you move down to California?

James: Oh, absolutely not. No, I’m flying back for every game.

Brandon: Are you really?

James: Oh yeah. I usually go to about four or five away games, too. I love … I don’t do much, but football is my thing. Football and real estate.

Brandon: There you go. That’s cool. I went to the Seahawks-Vikings game that was outside in Minnesota, what was that, three or four years ago?

James: Oh, you went to that?

Brandon: When it was like 30 below. Yeah, I flew into Minnesota. I mean, I don’t even go to games ever. That was my first Seahawks game ever. But Minnesota was my team growing up, and it was a big game, right? So I flew in and it was the coldest [crosstalk 01:13:16] of my life.

David: Is there anything in the world that’s fun at 30 degrees below zero or whatever-

Brandon: No.

David: It doesn’t matter what you’re doing. At that temperature, it isn’t fun.

Brandon: Yeah. It was-

James: You still had a better day than Blair Walsh, though.

Brandon: Yeah, that is true.

James: That guy … that poor guy.

Brandon: Poor guy. That was a rough day for him. All right, number four. What do you believe sets apart successful real estate investors from all those who give up, fail, or never get started?

James: I think the biggest thing you can have as an investor is having integrity and doing what you say you’re going to do. That has gotten me so much deal flow over the years, like building that representation and then telling … If I’m going to do something, I tell it to them and I’m going to stick to that, no matter what. That reputation alone gets me so many people coming to me to bring me stuff because they know if I tell it to them, and I always give them logic with my answer, give them logic, and then I just … and I’ve boughten properties that I told yes on that I ended up not really wanting to buy, and I did it just to keep the relationship going. But yeah, those … A lot of times, people go for these specialty, like, “Oh as a real estate investor, get a niche, do these things,” but core values will always make you stand apart.

Brandon: Makes sense. I love that.

David: I agree. I’ve done the very same thing, and it always comes back. And I think Josh Dorkin was actually a big proponent of that, as well, just you have to be a person of your word, and if you’re not, you’re not going to be in business long. That’s definitely been the case.

David: All right, well James, I have thoroughly enjoyed this. I had no idea that you were this smart, because you, like I said-

James: Not that smart.

David: … you’re a very humble guy. You don’t come across like a know-it-all, but the more you talked, I’m like, “Oh my gosh, this dude’s got it together. We’ve got a really good guest here.” For people that want to find out more about you and learn to be you, where can they find out more about you?

James: Well, my social media is … So actually, I will do daily, or not daily, but weekly videos of me visiting sites, looking at things. My Instagram handle is jdain, J-D-A-I-N flips F-L-I-P-S, or our company website is www.heatondainard.com, H-E-A-T-O-N-D-A-I-N-A-R-D dot com, and that kind of … and we do a bunch of different, just investor tool helping things there, so it’s all free. Our goal is just to always give back to the investment community and it pays back.

Brandon: That’s great. I love it. Love it. Super cool, and of course, we’ll have links to all that at the show notes, biggerpockets.com/show338. They can check out it there, I’ll have links to all those good things, including your social media and all that. So definitely follow James, check him out, check out his website, and with that, I guess we’ll get out of here. David Greene, you want to take us out?

David: This has been fantastic. He is jdainflips, Brandon is beardybrandon, I am davidgreene24. Follow us on Instagram to keep up with our journeys. Thank you very much, James. This has been an awesome episode, and this is David Greene for Brandon the beautiful bride Turner signing off.

James: Thanks guys.

Brandon: Perfect. That was great, dude. I’m going to stop my recording. Yeah, really phenomenal show.

David: Oh man. I didn’t word that very well, saying I didn’t know you were this smart and made it sound like you look stupid. That’s not how I meant that to sound at all. Brandon was laughing when I said it, and I was like, “Oh, I stepped in it right there.”

James: I prefer to look unintelligent anyway. Then you can sneak up on people.

Male: There you go.

David: Yeah, that’s my motto. That’s exactly why I look this way. Nobody sees it. Nobody sees it coming. But yeah, honestly dude, the more you talked, I’m like, “We could do like 10 series episode just from you.” You’re the perfect poster child for what investors should be learning.

James: Well, if you guys ever need anything, and just so you guys know, I have a bunch of free webinar stuff, if you guys … It actually coaches … About nine months ago, so many investors were having issues with construction. I did a four-part series on how to negotiate contractors, how to come up with … It’s very … Basically, it’s my process, I just put it out there, so that’s kind of what we’ve been doing is these free, like, “Okay, here’s my process. Here it is,” because it’s-

Brandon: That’s cool.

James: I’m not like a guru course guy, we’re not trying to sell that stuff. It’s just not my thing. But I like giving out free education.

Brandon: If you had any interest, I don’t know how … I’m not really in this department, so to speak, at BiggerPockets, but stuff like that is gold for the BiggerPockets YouTube channel, which gets tons of views. So if you wanted to, at some point, we can connect you with Zach and see if you want to do another one, or just take the one that you have and we’ll just edit it together and put it on the BP site. That’s not a bad idea.

James: Yeah, I would … I mean, whatever synergy there is, I’m always for it, so yeah.

Brandon: Cool.

David: And what’s your email, James?

James: It’s James, J-A-M-E-S at Heaton, H-E-A-T-O-N Dainard, D-A-I-N-A-R-D dot com.

David: Thank you.

Brandon: I feel like you need a url redirect so you don’t have to spell that every time you give people the url.

David: Yeah, it’s-

Brandon: Just go to James.com and it’ll send you to the website.

James: Yeah, that’s a good idea.

Brandon: That’d be expensive to buy that, James.com, but you know … Anyway, no, dude, this was amazing, so thank you. Yeah, and have you … You said learning to surf. Have you surfed before? Are you a surfer?

James: I … You know, I’ve surfed a couple times. My first time ever, I got up on a longboard, rode it all the way in and thought I was like brilliant, and I couldn’t do it after that. It was in Hawaii.

Brandon: Yeah, that’s exactly how it happens usually. Yeah, the first time you’ll get it. I actually, I help a lot of people learn kind of like the beginning surfing out here, and everyone does that. The first wave, they’ll ride it right in, and then after that, they can’t do it anymore. I don’t know. It’s weird.

David: It’s that focus you get when you’re brand new. That’s exactly … like the first time I went snowboarding, I made it all the way down because I was so insanely, intensely focused. But I just couldn’t maintain that for the whole trip. That’s why … I honestly think that’s what beginner’s luck is. You’re so zoned in on what you’re doing that you make it through, and then after that, you don’t focus that hard and that’s when it has to become muscle memory.

James: Yeah, are we going to go in July?

Brandon: Yeah. Yup, we’re going, if you want to come.

James: I’m in. I’m going to do longboard. I’m going to longboard-

Brandon: Good. Yeah, I’ve got four of them, four longboards, so yeah. It’s going to be an amazing time. Yeah, it’s going to be cool.

James: Yeah, I’m [crosstalk 01:19:16].

Brandon: Well cool. I’m excited. All right, dude, well, we’ll let you go, but thank you.

James: Yeah, thank you guys.

Brandon: Yup, see you later.

James: All right, bye.