Making $71K on ONE DEAL After 5 Failed House Flips and Six-Figure Debt

Ashley:
This is Real Estate Rookie Podcast Episode 279.

JP:
It was definitely a process like absorbing all those losses and just the mental hit it takes on you. That hit basically, I’ve just summed it up into a 250K education that I didn’t know I was going to want. Failure is a part of learning. It’ll be a cool story to tell my kids one day when I’ve built a cool company.

Ashley:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast where every week, twice a week we’re bring you the inspiration, motivation, and stories you need to hear to kick start your investing journey. Boy, oh boy, do we have an episode for you guys today. It’s not often that we hear stories that get off to such a rough start but yet have such a happy ending, wouldn’t you say, Ash?

Ashley:
Yeah, yeah. We are going to go through, it’s about five or six different ways that an investor failed at doing his house flips, his projects. Then we have brought on his actual mentor who helped him do his most recent one and how it became a success because of this mentorship. So they go through, I think there’s like six components of this that we actually talk about, like the financing piece, the timeline piece of the rehab. These six things we go through.
We have JP on. What was JP doing when he first started all by himself trying to figure it out compared to when he had Aaron’s mentorship to guide him through the last one? Aaron, pretty amazing, he’s done over 140 deals he says. JP, rookie investor, started in 2020 doing his research, did a house hack, and then started to get into house flips where he made mistakes just like all of us do. Wait until you hear the amount of debt that this put him into, these mistakes. Super inspiring person, JP is. He tells us that was his cost, that was his college, that was what he had to pay to learn to become a real estate investor.

Tony:
Like Ashley said, we cover timeline, contractors, budget, carrying costs, financing, and then finally taking that property to market. JP, who’s the mentee here, talked about what he learned from Aaron to make this last deal successful. So lots of really good nuggets throughout this entire episode.
Before we get into the conversation, I just want to give a quick shout out to someone by the username of Mrs.placidChaos. placidChaos left us a five-star review on Apple Podcasts and says, “Best podcast to get the info you need. Real estate investing is something I’ve wanted to invest in for several years now, but I’ve been intimidated by the thought that I couldn’t financially make it happen. But this podcast has showed me so many different avenues that can be taken, and I’m confident I’ll have that first property by the end of the year.” placidChaos, we hope that you do get that first deal, when you do apply to be on the show, because we’d love to have you. For all of our rookies that are listening, if you haven’t yet, please do leave us an honest rating review on Apple Podcasts. The more views we get, the more folks we can reach. The more folks we can reach, more folks we can help.

Ashley:
Okay, you guys, let’s bring in JP and Aaron. To start off the show, we have three questions that we want to ask each of you guys. JP, maybe you want to go first on this one. The first question is, how long have you been investing in real estate? When did you get started?

JP:
I got started in 2020. Basically, learned a ton about just real estate investing through BiggerPockets. A member from my church just mentioned it. I don’t know if I ever talked to him again after that. I just got into a rabbit hole. Was in college and realized this is definitely something I’d be passionate about and want to do, so I learned a ton. Then ended up buying my mom’s house after I graduated college and turned it into a house hack.

Ashley:
I’m sure we’re definitely going to get more into that later on. How many deals have you done so far since you started learning about real estate in 2020?

JP:
The project I’m doing right now with Aaron will be my sixth project.

Ashley:
Wow, that’s great, in just three years. Then the last question, what is your number one piece of advice for anyone getting into real estate?

JP:
I’d say don’t over-leverage, and you can basically learn by the school of hard knocks or learn from someone else’s mistakes. So after my experience, I definitely learned from somebody else’s mistakes, and either pay the cost or it’s money or just making a relationship and try to go that route.

Ashley:
Thanks for sharing that. Aaron, the same set of questions. First one, how long have you been investing in real estate?

Aaron:
I have been investing probably five years. I’m based in San Antonio. Before I was investing, I worked for an oil and gas company in a corporate environment. Then I think in probably 2017/18, I started binging BiggerPockets like everyone else in the world. Then eventually made that jump and thought I was prepared. I did the agent thing for a while. Then I started working with a broker who mainly worked with investors and buying off-market properties. So learned from him, worked with him for a while, did three or four deals there and was kind of like, “I think I can figure this out on my own.” Then started my own company buying houses direct-to-seller at the end of ’19, and then had been doing that about four years now. So wholesaling, fix and flip rentals, kind of a little bit of everything.

Tony:
Just one follow-up question on that. You said that you worked with this investor. Were you an employee of his and he had a company, or were you just kind of working as a helping hand? Can you just outline that relationship a bit for us?

Aaron:
He was a broker. I got my license. The way it was set up is, on off-market deals, we got a split. We got a split if we bought the deal, and we got a split if we sold the deal. Then he took half. Then it was just kind of a conventional split, like a normal brokerage or real estate team on traditional retail transactions. We did that for a while. Then after each deal got a little bigger and I was giving away half, I’m like, “I think I can figure this out on my own.” Then I eventually… Learned a ton from him, but then broke off after that to start my own company, do my own thing.

Ashley:
Aaron, do you even know off the top of your head how many deals you have done over the past five years?

Aaron:
Somewhere in the range of 140, 150, I think.

Ashley:
That’s super cool.

Aaron:
I have a business partner now, and we did 60 something last year, 40 something the year before that, so a hundred-plus. It’s not something I keep track of honestly, but it’s definitely something we’ve gradually grown over the years and continuing to look to scale, and it’s a lot of fun.

Ashley:
Awesome. The last question, what is your number one piece of advice for anyone getting into real estate?

Aaron:
My number one piece of advice would just be get that first deal done. Because the first rental I bought, I bought it with friends because I didn’t want the risk. Then we analyzed these rentals forever. We probably looked at a hundred deals before we bought one. But then that first one’s just a stepping stone, and it makes the next one easier and the next one easier. We do things now that years ago when I thought of buying in towns we’ve never been in or sight unseen or all these things, but it all builds on that first one and the first getting your feet wet and jumping in, it all gets easier after that.

Ashley:
Thanks for sharing that. I think you guys both gave really great advice. I’m sure as we continue through the show there’s going to be a lot more takeaways for everyone listening. So let’s get into it more. Aaron, let’s start with you as to, what was your biggest mistake in real estate so far? Once that mistake was made, what did you do about it?

Aaron:
Good question. I’ve made a lot of those. Especially this last year, as the markets turned, we’ve had a lot of properties we’ve lost money on. The one that I think of is, it was in 2021, one of the first houses I bought. It was from this family, and they pretty much owned half the street. They at one point had owned almost all of it, and they had eventually sold off a few houses. I was buying this house. My plan from day one was remodel it to live in for myself. Somewhere in the middle of that, I hired this contractor who wasn’t paying his employees. I gave him four houses to work on at the same time. Projects don’t get done. He runs off with money. I have houses that are vandalized because his workers aren’t getting paid.
Ultimately, I sold that house for a loss, which was fine. But to me, the reason I hate it and see it as my biggest mistake is I felt like I made a promise to this family, to the family that lived on that street. Like, “I’m going to be your neighbor. My full intention is to remodel this and move in.” I just felt like I let them down. The integrity piece of that hurts me more than the 20 or 30 grand I lost on it, just because I met with the daughter, I met with the mom, and really connected with them well. Then I’m like, “I feel like I let you down.” They were understanding, but it still hurts me a little bit.

Tony:
We talk about mistakes, but honestly, like you said, those mistakes are stepping tones towards something bigger because there are so many lessons that you learned throughout that process that I’m sure have set you up to now be the guy that does 50, 60 deals in a year. But it’s not without those mistakes that kind of help get you to that point. I really want to obviously dive into the relationship between the two of you because I think there’s a lot of good things to uncover there. Aaron, if you wouldn’t mind, just walk us through how you and JP first got connected.

Aaron:
Me and my business partner, we flip and remodel a lot of mobile homes, mobile homes on land. It’s kind of a niche we’re in. Then last fall, it was hard to sell deals. The market’s kind of crazy. So we just had this idea of, what if we gave someone the opportunity of we wholesale on the deal, but we walk them through the process? We let you use our contractors. We help you come up with your scope of work. We provide you an agent who will list the house for you. As part of that, we’re making assignment fee. It’s not a secret. But we’re going to try to help someone get a flip done how it should be because we’ve, over the years, gotten really good at that.
I just threw out a post on Instagram and had a lot of people reach out. Then JP reached out. We kind of knew each other through some connections and stuff. He was honestly the first person to reach out. But then I hopped on the phone with him, and he started telling me the story with, “I’ve done some flips in the past that didn’t go well.” I guess at this point I’ll hand that over to JP and let him dive into some of that. Yeah, that’s how that got started, and we just went from there.

Ashley:
JP, can you even just start us from the very beginning of when you saw that post and reached out, did you have some fear? Were you excited? What did you say to Aaron?

JP:
Whenever I saw that post, I was like, “Oh, this guy’s doing a lot of deals. He’s in San Antonio. Okay, cool. He definitely knows what he’s doing.” I had lost a lot of money doing flips myself. For this year, I’m rebuilding and wanted to get a successful project just for personal confidence and then also rebuilding a track record and such. So whenever I talked to him, I was letting him know about the previous experiences and brought up some of the problems that happened. He just was basically confident in telling me that we’d be able to work through those and that this project would basically be a handholding experience. So he presented the opportunity, and it was making sense to me. I was nervous, but also it was like, “Okay, I’m trusting that he knows what he’s doing,” and I wanted to go through with it.

Ashley:
JP, why did you want to keep going? You had had these failures. What was your goal? What was your why? What was the reasoning that kept you motivated to keep trying?

JP:
I graduated college with a mechanical engineering degree and worked in the corporate world for a year and a half. I just knew after multiple internships in college, this corporate life isn’t for me, and I was, just the entire time I was at that company, looking for a way out. I had begun working on these projects at the start of that.
Then basically all of that was rooted in wanting to build financial success because I grew up with a single mom and she always made like 30K and got child support and stuff, and we were just living paycheck to paycheck. So growing up with that, once I was in high school, I realized, “Oh, okay, this is my family. This is my mom’s situation.” I felt like I was always trying to help her budget and help her, “Hey, think bigger. Let’s do some more.” Once I got into college, that was just like, I want to learn a whole lot about self-development, real estate, financials and stuff. So I joined investment clubs and was always trying to find a side hustle and started a lawn company and things like that. I just had that deeper why of I want to be able to provide for my family and eventually provide for my mom because she provided for us growing up.

Tony:
JP, I’m just curious because a very similar situation where I went, initially, to college to be an engineer. I had an internship, paid super well, and same thing. It was through that internship that I realized that I didn’t want to be an engineer. Also similar backgrounds in that my mom was never a high income earner growing up either. I had this idea of I really want a stable career so that I can provide for myself and provide for my family. That’s what engineering gives you. It’s a very steady income. So if that was your goal, why not just be an engineer because that would give you that financial stability? What was it that made you say the entrepreneurial route maybe solves that problem more?

JP:
For me it was just like, I appreciated the security of it and that stable income where I was making 55K a year right out of college. It was just like, “I’m worth so much more than this.” The guys that were ahead of me, it was, “I’m really going to devote three years of my life to get where those guys are at and I’m not even happy if I was making that right now.” So it was just not enough for me basically. The security was great, but it was just me having an entrepreneurial mindset. I was like “I’d rather get paid for the work that I put in. If I work harder, I want to get paid more. I want to eventually grow a company and have a successful business and want to be able to just reap the rewards of my own work.”

Ashley:
I think that’s really great. Just listening to you give your reason, your why, your goal, I hope that’s motivating you guys listening to dig deep and find that reasoning, what’s going to motivate you and drive you. JP, you’ve had that moment where you have your why, you’re getting into real estate. Let’s talk about that first deal as to what happened with that deal. It was your house hack when you bought your mom’s property. Let’s dive into that a little bit more.

JP:
That one was basically me coming out of this BiggerPockets rabbit hole of just a ton of learning and wanting to get my feet wet, wanted to do something. I realized I was going to get a W2 income when I graduated college, and I was able to be bankable. So I talked to my mom about buying her house from her, and then she would get a decent cash out. It made sense for me because I was looking for my first deal. I was like, “Oh, I could just ran out the bedrooms.” So I basically spent the next few months remodeling the house, came to an agreement with my mom, and ended up buying it from her, and then rented out the other two bedrooms. Once that one was finished, I think I had two rented bedrooms. They were paying us most of the mortgage. Then I think I had 30K in my bank account, and I used that to get into flipping.

Tony:
I just want to make sure I’m understanding the setup here. Your mom owned the property. You then bought that house from her, and you turned it into a house hack for yourself. Am I understanding that correctly?

JP:
Correct.

Tony:
That’s pretty cool, man. I don’t think we’ve had anyone on the podcast yet that bought their parents’ house and used that as their stepping stone. It sounds like that deal turned out relatively well for you, JP. As a first deal, that one seemed like a solid base hit.

JP:
Yeah, definitely. It was a remodeled property that didn’t have too many problems because I’d fixed most of them. Then I was able to rent out the rooms. I was kind of hesitant. This is the house I grew up in. Do I really want to live here for much longer? But to me, it was a stepping stone. I was like, “This is going to be my first deal, and I’m going to scale from here, so I’m comfortable being here for a little while longer.”

Tony:
So you had some confidence built up after that first deal, and that’s what propelled you to move quickly into the next one. So just give us a quick rundown. After that successful house hack, what happens from there?

JP:
From there, basically, I had the mindset of I could do anything. I wanted to go into flipping, and I had a lot of confidence. I had just done a successful deal, so I had that 30K. Then I went and borrowed money from a guy that I met in college and then a couple other people. Basically, that was all private money, about 130K or so, and then I had 30K. I got a business partner that I met through a community group. I raised this money. My business partner was making a lot more money than me and had some projects going. So we basically used everything I raised and the cash that we had on hand to get into flipping. After a month or so of raising that money, we basically went really big and bought three houses over the course of a month. They were all from New Western Acquisitions, which is a large wholesaling company out here. That was three projects that I was doing all at once.

Ashley:
Before we dive into any more of your actual deals, I want to bring Aaron into here and hear Aaron’s point of view as when you’re having these initial discussions with JP, learning about his things, right off the top of your head or as you’re learning from him, where are the things that you saw there was opportunity for JP to pivot or to grow or to change, maybe things that you saw automatically that as a rookie investor should be doing it differently? What’s your insight on that initial overview of how JP was operating his flips?

Aaron:
Honestly, a lot of these details are kind of new to me. I know that he had something that went bad. I didn’t know the extent of that honestly. My biggest thing is just the level of the project. He was jumping into, “Let’s do a historic house with an addition. Let’s completely fix the foundation and rewire it,” crazy rehabs that I completely stay away from. So the biggest thing to someone new, it doesn’t have to be crazy margins, but something that’s comfortable, something more cosmetic, something that you’re not completely tearing a house apart, which is what I focus on personally. So I think that’s one big thing of that. Then, he jumped into so much at once.

Ashley:
So as an engineer, he was over-complicating things when it could have been simpler? Is that what you’re saying?

Aaron:
Maybe a little bit. But he was buying in really, really high price points, too, like big projects, big numbers, but really high price points for San Antonio. Then one thing, as the project progressed that we had a lot of conversations on was more value engineering type stuff. Like, cool, where can you put your money that’s going to increase the value the most? Not necessarily, “Let’s get the nicest granite in the world, but cool, we can probably save this door and save a thousand dollars.” Or we can do some other things like that to really maximize what the end product’s going to be without spending a ton of money. I think the big thing is don’t bite off more than you can chew. It’s really easy to over-rehab a house and make it look like HGTV. The goal is finding that balance of, how do you rehab it to get the most value out of it? I think that’s one thing that I initially saw and that we kind of brought to the table, too.

Tony:
JP, I guess you said this Aaron, but biting off more than you can chew. I think that’s a very common thing. Especially if that first deal was successful, you’re like, “Oh, man, I know what I’m doing. I got this figured out.” What do you feel are maybe some things that went wrong that got your projects off track? You can just rattle them off really quickly, and we can go into detail in a bit here. Just big picture, what are some things you feel that that went wrong?

JP:
To summarize the whole thing, those three flips definitely went wrong right off the bat with a GC stealing money, and giving draws up front, and just made every rookie mistake I could. Definitely did HGTV-style remodels on them. When looking back, I definitely would not have done all those things. Then doing additions on the properties, when looking back, I’m not sure if that really was a value-add after how much it cost. Then just using a GC up front when I didn’t know the remodel and trusting his thoughts and his numbers and everything was definitely a mistake. Then once I went out and I got my own GC license to run the projects, then I made every mistake I could with subs and trying to choose the cheap guys versus the middle or expensive guys and paying them up front, too. A big mistake that I really didn’t like was we were paying subs on a weekly basis, payroll almost, versus a completion route. Looking back, that cost us a whole lot more money than it would’ve just doing a fixed cost.

Tony:
Just really quickly, can you break that down, JP? Because again, a lot of our audience, they’re rookie real estate investors, some have no deals whatsoever. Just break down what you mean on the difference in that pay structure and why one way is more beneficial to you as the person running the rehab and one is maybe more beneficial to the person doing the actual work.

JP:
It really comes down to the person you use. The guy that quoted me, a prime example that someone could see, would be the drywall. On one of the big projects, he quoted me about $10,500. Then we ended up paying just a few of the workers that were out at the property on a weekly basis. That guy that quoted 10K-500 said he could knock it out in about three weeks. That was sheet rocking the whole thing, tape and floating, and then texturing it and getting it all ready for paint. It was a 2,500 square-foot house. Since we paid him on a weekly basis, he was just getting about, I think, 3K a week for him and his three or four guys that he had. Then after the drywall was complete, it ended up being about five weeks or so. So we spent 15K when it should have only been 10K. It should have only taken three weeks, but it took five weeks.

Tony:
Moving forward the way that you would structure that, I guess if you can just give us some clarity on the better way to structure that.

JP:
I would’ve gotten three estimates on it and tried to get a reference for those contractors, maybe gone on Google and picked a guy or two from the people that are paying for ads. I figured those are quality contractors that have a lot of references, but I’m expecting them to come in at a higher price point but would still to see what that number looks like, and then try to get a reference for two more contractors. Then I would’ve taken those three quotes and then compared which contractor I felt was willing to put money where their mouth is and start work without taking a ton of money up front and then gave me reasonable timelines that I would’ve been okay with. I would’ve chosen that guy.

Ashley:
Aaron, can you talk about how you mentored JP through figuring out the timeline and getting contractors. Those two elements right there, what were some of the big things that you tried to hit home with him so that the next deals could be more successful?

Aaron:
Honestly, that’s not a piece that we did a ton with. We have one main GC now that I’ve developed a relationship with over the last four years where he started doing small stuff for us, and then he’s built out crews that we now pretty much use them for everything, which I wouldn’t recommend. But there’s some key things about this GC that, the more I look at, it’s very safe. We rarely pay him up front. He’s done a whole house for us without us paying him. He’s never money hungry. I’ve had people on a course of a four-day tile job ask me for money five times. Those things are always like… I don’t know how to find the good ones. I just know how to find the bad ones, if that makes sense. But it’s just something that I’ve slowly built a relationship over time. We have a few different ones we use, and we know how they work now.
Even with that, we do enough rehabs, we know what things should cost. We have a price list for stuff. If he were to go out and find another GC, “This is the house. I’m not looking for the best price. This is what I expect to pay. Can you do it in that? Can you do it in this timeline?” That’s how I would go about finding new contractors, finding someone that’s experienced enough to know what things should cost. Then I wouldn’t be finding them on Craigslist or Facebook. I would try to go to more reputable suppliers. Like, “Hey, paint shop, who’s in here all the time?” Connect with that guy. Some more reputable ways like that.
Honestly, we’ve really lucked out, and we have a great GC. If you’re in San Antonio, I love you, but I’m not sharing. We’ve kind of lucked out with that, but it’s just built over time and slowly build a relationship of “Let’s do one house. Let’s do two. Let’s do more than that.” But if I were starting over, I’d go with some experience, understand what things should cost, and then shop around for contractors that way. If they only want to be paid in cash, I would stay away. If they want to be paid by the hour or weekly instead of by completion, I’d stay away from them. Just some pointers there. Honestly, we’re just real lucky on the contractor’s situation at this point.

Ashley:
I think that there’s a lot of information out there about hiring a contractor, what the red flags are, how you should structure your contract, things like that. I think it is very, very easy to get excited that you’ve found the perfect contractor, everything’s going to go great, or that you can start the project, this contractor can start now that you easily let things slide because you just want to jump into this project.
Like you mentioned, Aaron, some of those things are paying them hourly, paying them cash upfront, even just paying them cash, not even they want it all under the table, things like that, and providing yourself and the contractor with a clear scope of work laying out exactly what’s going to be done, putting into the contract the timeline. Is there going to be some kind of bonus if they finish early? Is there going to be some kind of penalty if they finish late? What do you do if there’s change orders? What’s the process? Just detailed and write out as much as you can. If the contractor isn’t going to follow these set of rules that you know in your heart and your gut that you should be doing to align with a contractor, and I say this from my own experience from not listening to myself and letting things slide, there are sure ways to protect yourself when you follow these rules.

Tony:
Ash, I just want to add one thing to that, because you said it and I just really want to drive that point home, but sometimes we get excited because that contractor can start right away. Sometimes it’s more expensive to choose the wrong contractor who can start today versus waiting for the right contractor that can start six to eight weeks from now. Because your holding costs on a flip is your private money, your utilities, whatever, insurance, and maybe that’s a few thousand bucks a month. You pick the wrong contractor, just like you said, JP, a job that should have cost $7,000 ends up costing $15,000, and you end up spending more hiring the wrong person. That’s a super important point. Aaron, I see you shaking your head emphatically at that point, too. Yeah, man, I just wonder, what are your thoughts on that?

Aaron:
I’ll echo what Ashley said. I’ve made all those mistakes. I had a contractor who pulled the roof off a house, it rained, all the drywall falls through, and I don’t fire him. Then I continue this for months. I’m paying him up front to keep his cell phone on. I get invested in supporting them and their family, and it’s like, none of this makes sense. Anyone from an outside view is, why would you do this? I’m like, “Oh, he’s going to get better. He’s like my project.” I’ve made all those mistakes. I’ve paid people up upfront. I’ve continued to give them work when they aren’t making the progress we agreed on, all of these things. It’s just something over time that you eventually get better at. I’ve had to learn it way too many times, though.

Ashley:
JP, can you just give us a breakdown real quick on the numbers on this flip as to the purchase price, what the rehab costs were, and then what you ended up selling it for?

JP:
I ended up purchasing the project from Aaron and his partner for $112,000, and then the rehab ended up costing $54,000 and the ARV on it was $230,000 and currently under contract at $237,000 with some concessions.

Ashley:
That’s awesome. Congratulations. I think you had mentioned before your rehab budget had been $40,000 to $55,000, so you were right on target there.

JP:
Yeah, definitely. It was trying to pinpoint around that 50K mark, but after a couple hiccups throughout the project, they ripped out a shower pan and there was damage to the wood and everything underneath, so it ended up costing about $54,000.

Ashley:
Now, Aaron, since you sold this deal to JP, I’m assuming you wholesaled it. What did you lock the deal up for, and what did you get for your assignment fee?

Aaron:
I believe we locked it up at like 86.5, and then we sold it to JP for 112.

Ashley:
Obviously, JP isn’t mad that you got it, you bought it for less, and you made money off of it because I’m sure the value he got from that deal from you mentoring him was way more than what you made in your assignment fee. Also, JP made money too, and he learned a lot. So I think that just shows the great power of networking or even finding a mentor as to there’s ways that that kind of relationship can benefit you both.

JP:
Yeah, definitely. I didn’t care at all that Aaron and them were making an assignment fee on it. He actually was willing to be a private money lender on it, so he lent 15K to cover the cash to close on the project. He mentioned that before we closed on it and I was like, “Okay, this guy’s willing to put money where his mouth is. He means what he says.” So I thought that was really cool.

Tony:
I want to circle back because the way that you guys came together was that, Aaron, you basically gave JP some guidance on this next deal. So I just want to talk about, as you guys have been working together, some of the changes that you guys have made. We’ve already talked a little bit about some of those things. Aaron, what’s the biggest thing that you’ve passed off to JP when it comes to timelines specifically?

Aaron:
I think the biggest thing is having that conversation upfront with your contractors. Also especially, especially in this current market where things are changing, they’re changing really quickly, we’re not jumping into projects unless we can be in and out in 60 to 90 days. So we’re trying to game the system where the market can change quick enough because we’re going to be in and out. So that’s one big thing. So timeline, it’s making sure we’re super clear on that as far as what we’re jumping into. That was something that we talked about with the contractor we used. He’s like, “Yeah, it’s going to take four weeks.” I’d known his work well enough, and honestly I had side conversations with him, “Hey, his project’s a priority. Mine are fine, whatever.”
I honestly was more invested in him being successful with this than my own flips. So I’m calling the contractor, “Hey, are you knocking this project out?” Like, “JP, is he making progress like we talked about?” So I was kind of involved behind the scene. I really wanted this to work. So that was one thing. The biggest thing right now was just making sure you’re not jumping into something big and kind of staying entry-level price point, and then, how quick can I get out of it? 60, 90 days. If it’s going to be something past that, it’s a good project for someone else.

Tony:
Sorry, just one clarifying question. When you say 60 to 90 days, are you talking about close to close, so from the time that you close on it on the purchase until the time you close on it to the sale, or just your rehab portion?

Aaron:
I want to have it listed in that time. Ideally, I mean close to close, but it doesn’t always happen. I think JP can talk about this, but I think his was right at 60 days.

Tony:
Well, I guess, let’s go to that, JP. How does the timeline on this new project compare to the first deals, and how did timelines impact that?

JP:
It’s a substantial difference. The first ones, initially got into them and was like, these contractors told me they can be done within eight to 12 weeks, and then we factored for six months. After all the issues, it took a year and three months for the first one, a year and six months for the other one, and a year and nine months for the other. So those all took way longer than it was supposed to. Then this one, the contractor said, once he starts work, he’ll be done in four to five weeks. This one had a seller leaseback on it, but once the seller got out, he started the first week of January, and he was done by second week of February, so just at five weeks.

Ashley:
That is a big difference.

JP:
I was doubting whenever he said the four to five weeks. I was like, “I’m factoring for six months of holding costs and everything. He told me five weeks, so I’m factoring in for double that and maybe a little more.” I was super hesitant but definitely shocked when I was like, “Dang, this went how it was supposed to.”

Aaron:
I’ll jump in there, too. He’s kind of leaving out some of the story with this seller. JP’s been great and really trusted us, which I really appreciate. This seller, the house, the lot, it was a mobile home on 1.2 acres. It was like a junkyard. He walks us through the house and is picking up car parts and telling us, “I don’t keep my money in banks. I keep it in car parts.” It was one of those, as soon as we close this, I was like, “Oh my gosh. We just sold him this house. We’re going to have to help him evict this guy.” It was not the smoothest, easiest beginning. The guy’s literally… JP can go into details on what was on the property, but it was an absurd number of cars, tires, parts. It wasn’t a super smooth sailing, but we got there.

Ashley:
JP, did you end up having to evict the person, or did they move out on their own?

JP:
No, they ended up moving out on their own. We did that seller leaseback. I was glad I held 5K, which covered about three months of hard money costs. I think the seller leaseback initially was for a week. Then he ended up taking about a month of following up with him, reiterating. He was like, “Oh, I’ll be out in two days,” another two days, then five days, then a week. Then after a whole month he was out. I was like, “Oh, okay, cool. He actually got out.”

Ashley:
Did he take his investments with him, or did he leave them for you?

JP:
He ended up taking three or four cars with him. Not even joking, whenever we were cleaning up the lot, there was like 19 junk cars left on the property that we had to have hauled off.

Tony:
Can I just ask, what was the cost to clear all the trash from the yard? Because that’s a big… You said it was a little over an acre just filled with cars and car parts. What did that cost?

JP:
I ended up posting a lot on Facebook: free tires, free cars. There was a pile of tires in the back that had 350 tires, too. Nonetheless, I found a guy that was willing to come pick up the cars. I guess he got cash for metal, so he was like, “Hey, man. I’ll pick them up for free.” He ended up being a really nice guy, was actually trustworthy. He said, “I’ll be out there.” He was calling me and communicating. He hauled off all 19 cars for free. So I was like, “Okay, cool. I didn’t make money off them, but I’m glad you did, and you helped me out with what I needed done.”

Ashley:
I actually went to my first scrap metal yard last week. I could not believe the organization. This scrapyard was more organized than my own life. Any piece of scrap was categorized. So all the lawnmowers together. All the cars were together. All the dishwashers were together. All the fridges were together. Everything was neatly organized into piles. It was crazy. We had taken a stove, I think it was, there. You drive over the weighted bridge and they measure you. You go and you dump off your stove in the stove pile. Then you drive back over the bridge. Then whatever the weight difference is, they cut you a check. So I think we made $8 off of that bridge or that stove that we got rid of.
JP, when you had initially done your numbers, did you budget for this? Maybe we can actually go into budgeting as to maybe compare and contrast as to how you were doing your scope of work and budgets before and then how you were doing it under Aaron’s mentorship.

JP:
The budget on this, Aaron and Jason were super helpful. I came up with the Excel spreadsheet and sent it over to them. Aaron actually sent me a video follow up going through my numbers and let me know what he thought was good, what he thought was a little high. Then I communicated to the contractor and got a couple adjustments.
Then for the cleanup, I under-budgeted. whenever the guy was moving out, he said he was going to take a lot of the cars with him, and I thought he was going to take more than three out of 22. Anyways, that along with everything else that he left there, just thought he was going to take more than he did. But I budgeted for one to two dumpsters, and it ended up being three plus paying guys to put stuff in their pickup truck and haul it off. So under-budgeted a little bit on that. Overall, the initial budget was 40 to 50K, and I put a 5K contingency just because I figured there’s going to be a hiccup and there was. Throughout the project, a couple of small things came up, so it ended up being like 54K rehab.

Ashley:
When you did this new budget, what were some things that you did differently than when you budgeted before? Did you have a clear scope of work because you implemented certain things that Aaron taught you?

JP:
Yeah, definitely. He gave me the contract that they use on all their projects. He went out and talked to the seller with me whenever we got to the property. Then once we had the house and we were able to start rehab, he went out there whenever the contractor came, and all three of us went over the whole project. He helped provide guidance on, “Hey, contractor, do this. JP, this is why we’re doing this.” Then went through all that. So he provided that. Then I allowed the contractor to write me up the scope of work and went over that with Aaron as well. I took his numbers because he gave a majority labor-only quote providing a few things like electrical outlets and some smaller things, but majority labor-only. So I took those labor-only numbers and just estimated all the materials for each item. I was like, “This is definitely manageable. I have what the guy’s going to pay to do it, and I just need to come up with what I need to get that part done. So this is how much this is going to cost.” That’s how it came up with my budget.

Ashley:
Aaron, I want to go to you for this aspect of budgeting are the carrying costs, because we talked about a little bit with contractors, sometimes it may be better to wait to get the perfect contractor. How did you help JP figure out the piece of carrying costs and just project management overall during that period of doing the rehab, too?

Aaron:
That’s one thing that we, with contractors, always try to get to because price is one thing, but time’s another. A lot of times with our contractors, I don’t beat them up on price a whole lot. It’s more like, “Hit the timeline. I don’t really care about the details.” Because a month saves us, if you have hard money, 12% on $200,000 a month saves you $2,000. So we care more about the quality and the timeline than specifically the budget on it, but really kind of nailing that down and getting that timeline and understanding because carrying costs can eat you up. We can look at it and be like, “We bought it at 70% or 75% of the after-repair-value minus repairs,” but the difference in not taking two months and 12 months, people don’t normally factor that in, but it is a huge, huge impact to the project there. So we really nail down, “What’s a realistic timeline? What can we get it done in?” and then try to factor that into the budget, the carrying cost, all of that. I don’t know if that answers the question or not.

Ashley:
JP, what were some of the things you learned about carrying costs?

JP:
They definitely ate me up on the last three projects, having three hard money loans at once. This one felt a lot less risky having one and having someone to guide me on it. So the carrying costs on it ended up being about $1,660 a month, and I budgeted for about six month worth of it. So since it ended up being one month of the seller, and he basically covered that with his lease and then essentially five weeks of rehab. Now it’s only been on the market for 30 days or so, so two months into the whole timeline of actually holding that. I definitely learned that one at a time when you’re starting out makes a lot of sense, and this risk was accounted for.

Tony:
You got ease into it a little bit. Aaron, you mentioned 12% on your money, what those monthly carrying costs are. You mentioned hard money. Is that how you’re funding most of your deals. What was your recommendation to JP on how to best set up the financing for this flip?

Aaron:
Great question. Personally, we use a mix of hard money and private money. Then if we use private money, it’s all set up where it just balloons on the back end so we don’t have monthly payments. Honestly, most of our lenders prefer that anyway. With hard money, of course, you’re going to have monthly payments with that. But we connected JP with a hard money lender we’d use before because a lot of hard money lenders aren’t going to touch a mobile home. So we had a specific one who we knew would based on our relationship with them.
There’s a lot of quirks with mobile homes. People don’t think they have value. Everyone’s scared of them, all these things. So part of that too is like, “Let’s connect him with this lender that we know will do the deal.” Then someone we’d worked with before, we know their draw process for. Once you complete the repairs, you’re paying all that up front, but you got to get that money back. I think that’s the thing with hard money that people will overlook a lot of times, too. Points rate is one thing, but what is the actual process when you’re in that project? “Hey, once I’ve spent my money, how do I get it back?” So that was one thing that we brought to that. “We’ve used these people, we know how they work, and they’re good to work with,” and kind of guided him with that.

Ashley:
JP, was a big part of this for you learning how to be able to sleep at night and not feeling over-leveraged, having multiple different pieces of financing? To tie it altogether, do you have any examples? Were these $1,000 a month your carrying costs that you would have to take out of your W2 pay maybe to cover? Was this $10,000 a month that you had to cover for your carrying costs? Can you give us an idea of what that looked like, what those numbers were on your projects?

JP:
On the previous flips or this one?

Ashley:
Let’s start with the previous ones and then compare it to this one.

JP:
The previous flips, the hard money costs ended up being around $9,000 a month. Having that just eat away and those timelines just doubling, you can imagine, this was not accounted for. So I literally was stressed to the peak and just praying, “Hey, I need help. I don’t know what I’m doing. I don’t know what to do.” When that amount hits your bank account, it’s like, “There’s another month gone of 10K almost.” This one, it was just like 1,600 bucks plus the electricity and water, so 1,800, 1,900 bucks a month is just so much more manageable. Previously, I was just completely stressed out all the time waiting for these projects to go right and waiting for them to be done, just trying to get to the finish line and get that weight and debt off my shoulders.

Ashley:
Were you using any other kind of funding, like borrowing money from a friend, credit cards, or was it strictly just that one financing piece, that one loan?

JP:
Got into it by using cash and then raised about 100K, 130K of private money, and had to actually go back to the private lenders to get more money just to finish out the projects. Then that money was used to get into hard money. So I had three hard money loans with private money and my own personal cash invested. Then once we just needed more money to get the projects done, it was credit cards, so I basically put everything on credit cards. I did that initially for like, “I want the rewards. If the lender’s going to pay me back a draw, then I’ll get 3% on 50K, whatever it is. Cool, 1,500 bucks.” But after I put my credit card out and then got the draws and the rehab’s way more than the draws, I had to hold it on my credit cards. So once it was all said and done, we walked away with like 80K still on credit cards.

Ashley:
First of all, $80,000 on credit cards. What was your interest rate, or did you have a 0% credit card?

JP:
The interest rate on them was all around that 25%. It was a mix. Some of the cards were new; some of the cards had been a couple years old. The new ones did have that zero interest for a little bit. But at the time of these projects, most of them, I think it was spread across nine credit cards because I didn’t have an 80K limit on one card. I had 8K here, 13K here, whatever it was.
I was just paying a ton on interest. I think it was 2K, 3K on 10 interest. So whenever we paid off the debt on the credit cards, actually I called each individual credit card company and asked them if they could remove stuff and let them know I had the cash to pay that off. We sold the rental property to get the cash to pay that off. They were actually willing to remove a decent amount of the interest payments that we had racked up and lessened that amount. Then Amex, I signed up for their financial relief program, so they brought my interest rate down from 25% to, I think, 3% or 4%. So that was really helpful.

Ashley:
That is so interesting. I don’t think we’ve ever had anyone talk about that before. Thank you for giving that as to how you handled it. You just didn’t go and say, “Well, now I got this 80K. I’m paying 25% on it.” Because I seriously got severe anxiety and I wanted to throw up for you just thinking about that. But that is awesome as to you looked at different ways to, “How do I mitigate the damage on this?” Thank you for sharing that piece. We’ve never had anyone talk about that before.

Tony:
Two follow-up questions for me, JP, just how much total debt? Excluding the hard money, but from the credit cards, you said about 80K, and then another you said $130,000 so $80,000 plus $130,000 is like $210,000 in debt, give or take. So you had a decent amount. I guess the follow-up question here is, when you realized the projects weren’t going according to plan and you said you had to go back to your private money lenders to ask for more capital, I guess, were you able to eventually pay them off, or did they take a loss when you sold these properties at a loss? What was the end result with these projects kind of going haywire with the budgets?

JP:
Total debt, and then how did things work out with the private money lenders, right?

Tony:
Right, yeah.

JP:
So the total debt, once we sold that last project, it’s like, this is our actual debt scenario, and we were trying to figure all that out. Things were not organized throughout the whole projects, obviously since they completely went wrong. There was about 80K of credit card debt. Private lenders did that 130 initially, but had to go back for them for more throughout the projects to cover things, so it ended up being one gave us $160,000 and the other one gave us $90,000 and then had two others that amounted to another 20-or-so K of debt. All of that was private money. Then I had the ADK of credit card debt, so that was the total amount.
Then how things worked out was I had to approach them for more money throughout the project. I was just like, “Hey, this is the scenario. We have these payments coming up that are going to cost us to foreclose on these, so we need more money.” It was just really hard conversations to have, but was trying to do it all with integrity. We’d gotten screwed over by a lot of contractors. I was just like, “I’m not going to let that affect my character. I don’t want to lie to these people that are trusting us with their money,” so just was being clean about the whole thing and talked to them about that. They understood the situation. They looked at our numbers and everything, and they were willing to lend on it still and give us more money for the rehab. Then from there, ended up taking longer too and more money.
But once we closed everything out, those lenders were partially paid back from a second lien on one of the properties. Then the rest of it, they were just going to take as a loss. It was to the LLC that I’d created. I could have just said, “Sorry we lost all this money and better luck next time.” Instead, I was like, “No, that’s not how we want to do things. You lent me your money and you entrusted me with it, and I want to pay you back.” I ended up working out payments over time with them. That house that I house hacked, I plan on selling that in the summer, and then that should net a decent amount that I can hopefully get a big principal payment paid off to them.

Tony:
I just want to make sure I’m following. When you finish the actual flips, obviously those sold at a loss. So what you said is, “Hey, private money lender, I’m going to keep this note open with you for whatever I still owe you.” Basically right now you have an unsecured debt with those people, and your plan is to continue to pay them back until they’re made whole on that original investment. Am I understanding that correctly?

JP:
Right, yes. Created new promissory notes for the remaining balances and extended timelines and amounts that were paid monthly and reset everything, and then started making payments going forward from there.

Ashley:
I’m still hung up on finding out about this Amex financial relief program because I might rack up some credit card debt because my line of credits are towing that 9% edge, and that 4% to 5% sounds pretty good.

JP:
It’s a one-year program. I think I was holding… These eight to nine credit cards were a mix of mine and my wife’s. So I signed us both up for it. Hers had like 20K on her Amex, pretty high limit. Then mine had 9K. We signed up the financial relief program, so got those down to 4% on both of those.

Ashley:
Wow, that’s really interesting. I’m definitely not recommending anyone get credit card debt, for sure. Definitely not. But if you do have yourself in a situation, definitely something to look into. I guess, what is the outcome of this last flip? Where did it go?

JP:
This last flip, it’s currently under contract. It got listed basically a week after the rehab was finished with pictures and cleaning and such needing to be done and sat on the market for about 30 days. It took a couple weeks to become FHA eligible, but this past weekend just got an FHA offer on it. So it’s currently under contract.

Ashley:
Congratulations.

JP:
Thank you.

Ashley:
To tie it all together, Aaron, what were some of the things that you helped JP with as far as listing the unit and get it ready for market? Were there some things that you felt were valuable that he learned compared to the last flips that he did?

Aaron:
I guess just our overall philosophy on listing stuff right now is past comps don’t really matter. We’re pretty much looking at what’s on the market and what’s active. We’re trying to have better amenities, better finishes, and cheaper price than anything out there because there’s a lot of inventory, and buyers are pickier than I’ve ever seen them. So that’s one thing that we do that I’ve talked to JP about is, “You kind of have one shot right now. We got to be aggressive with listing this. This is not the time to try to push values. It’s the time to get it at a price point where it really makes a lot of sense, and you get a lot of eyes on it.”
Then the other thing too, just our rule of thumb, is… It’s not FHA eligible until you hit 90 days. To me, it’s awesome if you finish a project before it’s eligible because you’re like, “Hey, we just crushed it.” But at the same time, our rule of thumb on that is we don’t price drop until it’s FHA eligible. So if it sits for two or three weeks and no one buys it cash or conventional, there may just be people that want the house, but it’s not FHA eligible for it. We’ve had scenarios with that where on that 90, 91-day mark, we get three offers because all these people liked it but they couldn’t buy it yet. So that’s just one thing, how we approach listings, and if they’re not eligible for FHA… Especially right now it seems like we’re getting a lot of FHA buyers on both mobile homes and normal single-family homes. So we just make sure that we at least ride out that period before we do any sort of price drop or reduction or anything like that.

Ashley:
Well, thank you guys so much for coming on and sharing this incredible journey of you guys’ matchmaking and making this deal work for JP. It’s been really cool to compare and contrast, even though it obviously really sucks JP about your first flip as to how they didn’t work out exactly as you wanted, but it is amazing to see the transformation, you, as an investor, and how you kept going. You didn’t give up, and you found somebody that could help you figure it out. Thank you guys so much for coming on and sharing. I really appreciate it.

Tony:
I just wanted to add, JP, just major kudos to you, man, because talk about mental fortitude and perseverance and grit. I think if the average person got started in real estate investing the way that you did with these experiences that feel like these massive failures, I think most people would’ve stopped. They just would’ve licked their wounds and said, “Real estate investing is not for me.” We’ve interviewed people on the podcast who took years and years after that first failed attempted real estate investment before they got back into the game. Brother, the fact that you were able to keep your head high and move forward with confidence and with grace, it just speaks volumes to who you are as a person, man. So I want to congratulate you on that.

JP:
Thanks, really appreciate those kind words. It was definitely a process, like absorbing all those losses and coming into that, just the mental hit it takes on you. Basically, it took six months between that last flip and getting into this one with Aaron, or I guess eight months. In between there, it was just figuring things out, working as a real estate agent. That hit basically, I’ve just summed it up into a 250K education that I didn’t know I was going to want and didn’t want, but definitely would’ve spent that 250K differently. Failure is a part of learning. It’ll be a cool story to tell my kids one day when I’ve built a cool company.

Tony:
That’s an MBA in real estate investment right there, man. You got a world-class education.

JP:
Yeah, definitely.

Ashley:
Well, JP, where can people reach out to you and find out some more information about you?

JP:
They can reach out to me on Instagram @JPDesmet97.

Ashley:
Aaron, thank you so much for coming in and giving your advice and letting everyone else get value out of the lessons that you helped teach JP. Where can everybody reach out to you and find out some more information?

Aaron:
The best place is probably Instagram. It’s just my first name dot last name, so @Aaron.Beal. I’m pretty responsive there, so hit me up if I can do anything to help.

Ashley:
Okay, awesome. Thank you guys so much.

Aaron:
Thank you.

JP:
All right, thanks guys.

Ashley:
Tony, what a great episode. This is one of the first times that we’ve really had a mentor/mentee program. I think in one of the first maybe 20 episodes of Real Estate Rookie, we had Ryan Dossey on, and we did kind of a mentor thing. But definitely haven’t had this kind of setup before on the podcast, but I really liked it. Definitely an interesting relationship when you tie in all the components of how they worked together.

Tony:
It was just such an interesting story. I mean, JP, talk about just having, I don’t know, nerves of steel to keep going through even when things get tough. I think it just goes to show, Ashley, how much good mentorship can save a new investor from so much headache. It can really shorten the learning curve when you have someone who’s made the mistakes already and can stop you before you jump off into the deep end and follow in those same footsteps. It’s night and day between the first flips that JP did versus the one that he did this more recent time with Aaron.

Ashley:
They didn’t really talk about this till the end, but I really liked how it showed they both had advantages to this relationship. So it wasn’t even just the mentor piece, but they were both making money off of this deal, which I thought was really interesting. JP had said it as to Aaron kind of put his money where his mouth was by putting up 15K to help cover some of the costs of the project. I think it was maybe towards a closing cost or something like that. I think if you’re looking to mentor with someone, go back and re-listen to this episode and really take away some of those key points as to how their mentorship worked so well. Because you can pay someone to be your mentor, and JP basically did that, but through a deal and not just, “No matter how the deal ends up, here’s $5,000 a month for you to be my coach and my mentor.”

Tony:
It was really, like you said, I think, a win-win situation for both of them. I think another big takeaway that I liked, Ash, was the talk about the contractors. You and I have talked about this before. How do you find the right contractor? How do you pay the contractor the right way? I thought Aaron had a really interesting point where he said, “I don’t go to Facebook groups. I don’t go on Craigslist.” But he’s going to places where good contractors congregate in person, and that’s where he’s kind of finding his folks. He didn’t even say Home Depot. I think he said the local paint shop is where he goes. I’m like, “Huh, that’s an interesting take on it.” It’s kind of counter to what you hear from a lot of folks about where they go to find their contractors.

Ashley:
All in all, great episode. We hope you all enjoyed it, too. If you loved this episode, please leave a five-star review on your favorite podcast platform. Then I also want to give a social media shout out. We’ve been doing these a little bit now. This week I wanted to shout out @rozenbergsteve. He is a friend of mine that actually started out as my mentor. It’s been probably three years ago now since I first slid into Steve’s DMs, and he became my mentor and really has just changed my life. He posts all about building your business, systems and processes, and not even just real estate specific, a lot of businesses, in general, he tends to help, but also a lot of mindset stuff, too. So I want to challenge you guys to give him a follow.
He also had something extremely tragic happen to him personally that he’s been sharing on social media. I think just the things he’s trying to learn for himself but also preach to others because of this tragedy, I think will have an impact on us all. Steve recently did this post, and it’s an Arnold Schwarzenegger kind of statement here. “Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength.” I know Steve is probably feeling this quote right now. I want you guys to go and just take a look at his story and what he’s going through right now. He is such a master at looking at something and figuring out how he can impact others so that they come out better than what has happened to him and how he’s feeling. So that’s our social media share of the day. We got to have a name for this segment, I guess.

Tony:
Yeah, I know. We got to come up with something catchy.

Ashley:
“Then slide into this person. Here’s the Instagram account.

Tony:
The social-

Ashley:
You’re going to slide into their DMs.”

Tony:
There.

Ashley:
As always, you can find Tony on Instagram @tonyjrobinson, and you can find me @wealthfromrentals. We will be back on Saturday with a Rookie Reply. (singing)