Financial Freedom in 10 Years and $200K Cash Flow with a Small Portfolio

Ashley:
This is show number 369.

Ashley:
Today, we are going to be talking to someone who is not just a rookie, but has some great advice for rookie listeners. So father of three, 10 years to financial freedom and how it is possible for you. We’re also going to get an update to the binder strategy. So maybe you guys have heard this guest before on the BiggerPockets’ Real Estate Show, and we are going to get some updates as to how it is achievable for you to do this to get the best rents that the tenant picks. I’m Ashley, and he’s Tony.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, not once, not twice, but three times a week, we’re bringing you the inspiration, motivations and stories you need to hear to kickstart your investing journey.

Tony:
Now, in today’s episode, we’re going to talk to a landlord who says it’s been five years, been inside some of his rental properties. We’re going to figure out how to get your tenants to ask you for rent increases. And most importantly, we’re going to talk about why rookies and how rookies should evaluate a market as a whole and a heck of a lot more. So today we’ve got Dion, who is a boot camp TA extraordinary. He’s helped Ashley a lot of her boot camps. He’s a go-to name in the Real Estate Rookie Facebook group and so much more.

Tony:
Dion, we’re excited to have you on, brother, but we’ve heard that you took on a new strategy, so let’s get into that first.

Dion:
Howdy. I’m so excited to be here. I love that you called me not a rookie because I originally applied to be on the Rookie Podcast. This is where I think my information helps the most. I only have eight properties. It was 16 units when I retired in 2022 that produced a little over $200,000 in profit. So I think I love BiggerPockets. I love being on the BiggerPockets podcast, but a lot of the people that are on there have huge portfolios, have done many massive things, and I think I focus on the person who’s just starting out.

Dion:
And I really take my strategy from the book One Rental At a Time where that book talks about get to four. If you get to four properties or four units, learning those basics, just getting the, how do you find tenants, how do you screen tenants, where do you get a lease from, what’s a landlord utility policy, just the basics down. That’s when a person can decide, “Do I want hundreds of units or am I happy with what my goal ended up being was the right amount of cash flow from the least amount of units?”

Ashley:
Now, Dion, do you suggest getting all of those four units at once or is this, we get one, we get it set up and then we take on the next one?

Dion:
I call myself the lazy investor. I started from a really bad position. I made it to 40 without ever investing. I had been laid off from law enforcement because of the 2008 housing crash. Found out about $89,000 in bad debt in my name I didn’t know existed until the divorce, was a single parent with three kids, started teaching at a CDL school making $17 an hour. So there was no way I was going to acquire four properties all at once. And I think there’s a lot of people that aren’t in a great position, but if you found this is your first time watching this podcast or hearing any information like this and you started today, it doesn’t mean you buy a rental tomorrow.

Dion:
When I started at 40, the first duplex house hack took two years. I had to work in the new industry for two years to become bankable with lenders. I had to save a down payment. I moved from my house into an apartment and rented out the house so that I can get rental income on my tax returns. That got me the bad debt-to-income ratio of all that debt I didn’t know about. And so two years to buy the first duplex and then two years to buy the next duplex. So once I had those two duplexes, I realized this is a concept I think I hear people hope for, is real estate investing is not passive. Real estate ownership is very close to passive. To self-manage my rental properties, it takes less than two hours a month. But to buy that first duplex was hours of podcasts, audiobooks, networking with investors, working on my credit score, learning how to save, working overtime in a side hustle playing World of Warcraft and selling things online to make extra money on the side to get that first down payment.

Dion:
And no, I don’t think it’s something that’s going to happen very fast, but once I got to those four, I really knew that I didn’t want a hundred units. What actually allowed me to retire early was that bright cash flow. And most people focus on their freedom number. For me, there’s really two numbers and I always hear the freedom number. Financial independence happens when work is optional. But I wouldn’t want to retire early. For me to live my life since I house hack, drive paid off cars, takes about $4,000 a month. If my cash flow hit $4,000 a month, the last thing I want to do is retire. One health concern, one major expense, one recession. So the financial independence number can happen when your work is optional. But my retire early happened when my cash flow passed my retire number, which was for me four times my cash flow.

Dion:
When my rental started producing more than $16,000 a month, I felt kind of silly going to work even though it was a job I loved. I just realized there’s all this time freedom. I could have 15 hours a day that were mine where the average person and what I had was about four hours a day. So I was tripling the amount of time that I was going to live in the next year.

Ashley:
And I think there’s a lot of people that are going to want to hear more about how you started and the beginning of your journey. So I’m going to refer them to episode 448 on the Real Estate Show.

Tony:
Dion, first, I just want to give you some kudos, brother, because you said a lot of amazing things in these first three minutes here that I don’t want our rookies to kind of gloss over.

Tony:
First, you said that you’ve got a portfolio that’s doing $200,000 a year in profits to you, which is phenomenal. And I think that’s what everyone’s going to fix it on. It’s like, “Man, Dion’s crushing it, $200,000 a year in cash flow. I need to be like Dion.” But they’re probably going to gloss over everything you said after that, which was, “It took me two years to buy my first rental. It took me another two years to buy the second one. I invested a tremendous amount of time listening to podcasts, reading the books. I moved out of my primary residence so I could get the DTI income calculation to work.” So when you think about that $200,000 in total, what was the total timeframe to get you to that point, from the day you decided, “I want to invest in real estate,” to the day you actually said, “Okay, I’m at a point where I can leave.” How much time did that take in total?

Dion:
Eight years was financial independence where I started making more than 4,000 a month, right? It starts really slow. The first five years suck. It just doesn’t happen fast. We hear of a lot of investors like Cody and Christian from their multifamily strategy where Cody had 30 rentals before he could buy a beer. So I stress often that the first five years are going to suck, but the next five years are worth it when that income snowball kicks in. And it’s not… When I hit the 10-year mark, I’d had that duplex for eight years. Eight years of rent increases, eight years of appreciation and principle pay down. The next duplex that I got when I was four years in had six years of appreciation, rent increases, refinance to lower interest rates.

Dion:
At 12 years, it was a 12-year journey to hit that 200,000. It was 204,000 in 2022 when I looked at my income and I thought for most of my working career, I’ve been in the Marine Corps, I’ve been in law enforcement, I’ve been a truck driver and teaching CDL’s drivers, I usually made around 40 to $50,000 a year and saved to invest and raised three kids. So when it hit 200,000, I was running the CDL squad, been demoted all the way down to the president of the company. I could run my own schedule. I had a job I would’ve wanted my entire working career. But time freedom was more important.

Dion:
So I hope people understand that yes, the end result is completely worth it for me. We can’t stress enough how much time, energy and effort goes into those first five years, and that’s when I think most people quit. Most people want to buy the first rental now don’t realize those first two years to save and invest, you don’t have proof of concept. You think it’s theoretical. You might run into some other people who’ve done it because right now today, if you started today, that means you’re closing in 2026. What’s going to happen to the market between now and then? What’s going to happen to interest rates between now and then? What’s going to happen to your work between now and then? That’s the time commitment that comes in.

Dion:
But when you get close to that 10 year mark, I think financial freedom is possible for anybody in 10 years or less, almost no matter what your starting position is. But what are you willing to do? Are you willing to house? Are you willing to work overtime, change companies for a bigger pay increase, move to a less cost of living area especially with remote work being as optional as it is now more than any point in our lives? And there’s a lot of people who want to make those choices. And because of that, they’ll end up working 20 or 30 years longer than I think they need to.

Tony:
Dion, so much gold in what you just said, brother. And I hope our social team just chops up as much of that as they can to share that message with the world because that’s what I was hoping you would get at, is that there’s this infatuation in our society with getting rich overnight. There’s this infatuation with finding the easiest, the path of least resistance. But oftentimes that path of least resistance leads us to an end result that isn’t necessarily what we want. And a lot of times the true success that we’re looking for takes a little bit of sacrifice, takes a lot of hard work, takes a little bit of doing the things that maybe you don’t want to do today.

Tony:
So if there’s one thing that I hope rookies take away from this episode, it’s first to be patient. Second, to understand what you said. Most people quit before that kind of escape velocity happens, right? And then third, if you stick with it long enough and you follow the right process is your chances of being successful are relatively high. You just got to have the grit to see it all the way through, man.

Ashley:
So we understand you got into a new strategy recently that you haven’t done before. You had to deviate and kind of pivot based on this deal you were working on. So when we get back, I definitely want to hear more about that.

Ashley:
Okay. And welcome back from our short break. So Dion, please tell us about your most recent deal.

Dion:
So whenever I talk about the strategy, I think I offend a few people. I’m not somebody who’s done the BRRRR strategy. One of the reasons I get so much cashflow is I’ve never done a cash-out refinance. I’ve never taken out a home equity line of credit and I’ve never sold to do a 1031. I like to recycle cash flow instead of capital.

Dion:
So after reaching financial freedom and after retiring, I thought, “I could probably do the BRRRR strategy now.” Because here’s a problem I hope everybody has around that 10 year point, I had the rentals, I had the cash flow, work was optional. And that’s hard to say that this sucked, but there was about 500,000, that was $480,000 sitting in the bank that I wanted to invest. But I don’t want a lot more units. I want the right amount of cash flow from the least amount of units.

Dion:
So I was thinking, first I thought, “Why don’t I go and buy in another country? I’d like to spend a few months a year in Colombia, a few months a year in Thailand. I do a lot of scuba diving.” And I thought, “I’m going to try Portugal.”So I thought I’ll go there and I’ll buy cash. And I had a two-month time in Portugal studying the real estate market, realized I didn’t want to buy there. Instead, I used a strategy that I call my travel house hack. Instead of buying in a foreign country so I could travel there, I thought I’d buy a local house hack, add another duplex to my portfolio that I take the income from that duplex and use it to pay for Airbnbs and midterm rentals when I travel. So this is my travel house hack BRRRR.

Dion:
I was looking in my market and I couldn’t find deals that worked, but I’ve seen the biggest shift recently is remote work. I mentioned this, remote work is more of an option now than at any point in our history. So I invest near Tacoma, Washington. Seattle is a very high cost of living area. Real estate’s very expensive. It’s basically, to the people who live in my area, it’s unaffordable. It’s why they commute. Well, remote workers have pushed out how far people will rent. So rents 45 minutes to an hour and a half away from Seattle have gone up 20 to 30%, but home prices haven’t because the remote workers, well, they’ll move further out, rent a bigger place, only have to commute into the office once or twice a week instead of five days. They don’t want to buy, because their office, their company might call them back to the office next year. So they don’t want to own a property. They’re not looking to become landlords.

Dion:
So I looked out, I pushed my market out about another 35 minutes, found 11 new markets, two of them made sense. Found a bunch of deals where with the new increased rents and still kind of last year’s home prices. I found deals and started making offers. The biggest shift was for the last decade, speed mattered. You wanted to make an offer fast. I had several agents with auto searches set up. I wanted my letter of pre-qualification and docu side offer in within an hour of me finding the property.

Dion:
That’s not the case anymore. The big shift now is days on market. I’m watching. I specifically set my searches up for properties that were on the market more than 91 days, meaning the person relisted it. And so I found a couple properties. This duplex that I ended up buying was on the market 147 days. And I figured this is the type of property that can take what Patrick Bett-David calls the disrespectful offer. It was listed for 500,000 so I offered 400,000. So I went in with an 80% offer. They counted it 477,000. I offered 400,000. They said 444,000 and I said 400,000. Back and forth all the way down to where I canceled the deal and they reached out and said, “We’ll take 400,000.” So I closed on it for 400,000.

Dion:
One side is livable, the other side is a rehab, and it’s my first. I usually buy properties, and this is why the binder strategy exists. I buy properties that have tenants in place that doesn’t need a lot of work. Maybe 1,000 or $2,000 because I was working full-time raising three kids and I would fix a few things. I’d put in coded locks, motion sensor, LED lights, ask the tenant if there was anything they wanted fixed. And two months later I’d do the binder strategy and get the rent increased.

Dion:
So this was my first time taking on a project of learning that we have to ask our government for permission to improve our properties, which the permit process is very frustrating with. So I technically call this my first and last BRRRR. This is going to create over $250,000 and I don’t want to do it again.

Dion:
So if there’s somebody out there who enjoys the BRRRR method, this is how I did it. I expanded my market, I watched days on market. I made offers that made sense at numbers to me, got this accepted. I’m doing the repairs while living here, the contractors, the learning, the time schedule. I used my own money. So this is where I think my biggest, my personal problem… Not a problem, but my problem with the BRRRR strategy is, if you use hard money, you’re on a strict timeline.

Dion:
And I looked at this, I had an estimate come in with a contractor. They said, “It’ll take about three months and $30,000.” Well, I’m over six months in now and over $50,000 and it’s not done. So if I had hard money, I would’ve tripped up. But since I’m using my own money, if I refinance at the end, it’s going to end up being about a 12% cash on cash return. If I leave all of the money in, which is what I think I intend to do, it’s going to be about an 8% cash on cash return, but I’m going to use that money for traveling.

Dion:
And so doing the BRRRR method for me, it’s more of an experiment after reaching FI. Had I done this early in my investing, I don’t think I’d be FI now. I think I had so much to learn that learning curve in the beginning of what a repair takes, how to find contract. I used the Thumbtack app to find my contractors. Didn’t know about that for the first probably five years. And I think I’ve hired 11 different contractors to do parts of this rehab all from the Thumbtack app and that I’ve now used on my other rentals since I’ve had this project.

Dion:
It’s not that it’s a new strategy, it’s a new strategy to me being the BRRRR strategy that a lot of other people have had success with and challenges with. My friend Millennial Mike, who is a first responder law enforcement, lives in the Seattle area, but invests in Gary Indiana. His first two BRRRR methods, interest rates almost tripled from when he started his two BRRRR projects to when he finished. He was able to do it because it wasn’t his first couple of deals. He was five or six properties in when he did that. So I waited until I was financially free, had the resources to do it, can completely mess up and won’t have to go back to work.

Dion:
But I think the things that people can take away is if you expand your market, remote work has changed that, change from making quick offers to watching days on market and making offers that make sense to you. Hunt for the deals where someone else misses the value. When I found this listing, this was to me the perfect fine. All of my deals are from the MLS, no driving for dollars, no mailers, no extra. I’m the lazy investor. I was working full-time raising the kids, so I got used to just having auto searches set up. This property came in. And from the listing there was the word duplex in the description one time, but it was listed as a single family house. There were no pictures of two meters, there was no pictures of separate entrances.

Dion:
The one image showed the top half and it looks like a single family small house because it’s on the side of a hill. The whole bottom half of the duplex is downstairs. It’s my first up-down duplex. I literally had to drive to the property to figure out if there was a duplex here or a house and couldn’t tell from the street.

Dion:
So this was an accidental thing. I called the utility companies and I said, “I’m trying to verify. Is this a single family house or a duplex?” And the utility company said, “We can’t tell you. You’re not the owner.” But they told me that the gas service has been off since February due to non-payment. So they weren’t willing to share with me that there were two meters, which there are, but they would share the personal financial information of the owner, which helped me because I knew financial distress, stick to my numbers, they’ll come down to 400,000 eventually. And so there’s a lot of little things in there that are kind of unique but can be applied to almost any property that you’re looking at.

Tony:
Dion, I just want to comment on that because you bring up something that I think is a unique strategy. We had Ariel Herrera back on episode 349. Her entire investment strategy when it came to acquisition was identifying those properties that were misrepresented on the MLS. So like how you said, you couldn’t tell if this was a single family or duplex. That was her whole acquisition strategy to where she would look for properties that were listed as one bedroom, but maybe the square footage was 2X the normal one bedroom square footage. So that was her strategy.

Tony:
Something I want to quickly go back to though, Dion, is you said that you changed your buy box to look at properties that have been on the market for 90 plus days. I think it’s incredibly smart, but I know for a lot of new investors there’s this almost stigma or fear around offering on a property that’s gone stale in the MLS because they just assume, “Well, if other people didn’t want it for the last three or four months, there must be something wrong with it.” Did you question that? Did you worry about that stigma? And if so, what gave you the confidence to move forward anyway?

Dion:
So I make sure, I want to give credit where it comes from. Sean Cannell of Think Media has a YouTube channel on how to grow YouTube channel. So he’s not in real estate. But he says these four words, and these four words I applied to real estate in a hundred different ways. Confidence comes from competence. When you are competent at studying your market, you’ll have the confidence to make offers. When you’re competent at studying a new market… I had to look at 11 to find the two that made sense, then I was confident to make the offer. When I was competent at using the Thumbtack app to find contractors and handymen to do a BRRRR, to do a rehab, then I was confident to do the BRRRR. So it was gaining the competence at the tiny little tactics that come together to make the strategy where the confidence comes in.

Dion:
It’s kind of like for me, there’s six steps to getting starting in real estate and it all comes from when you get good at when you move to the next. We learn to save. Once you know how to save, it makes sense to look at your credit score. Once you know your credit score, it kind of makes sense to go talk to a lender. Once you’ve talked to a lender and you know what your options are, it kind of makes sense to pick a market because you know how much you can borrow. Once you know your market, then you can pick a strategy. Once you have a strategy, now you go talk to an agent. All of those little skills come together when you become competent in each one, it gives you the confidence to go to the next step.

Dion:
And that’s pretty much what brought me into this deal, is in the beginning I didn’t have the Thumbtack app. I didn’t know how to find contractors. So starting a BRRRR would’ve been… I would’ve needed a partner. I would’ve pulled in Ashley. I think reached out there to the person who has the skill set that I don’t and come together that way. I didn’t do that. So once I had the skill, it made sense to I know how to find contractors, I know how to get good quotes.

Dion:
Here’s a behind the scenes thing. Before I joined the Marine Corps, my whole family owns tree services. My dad owned one, my two brothers owned one. I joined the Marines because that was easier work than working in trees. But I was the estimator. One of my jobs was I’d go out and I’d estimate the job. The reason I use multiple contractors for any job with any of my rentals for the last 10 years or this BRRRR that I’m doing is because I know that I would never want to work with one contractor. Because when you’re working with a contractor, your price isn’t determined by the job. Your price is determined by how much work they have on the books.

Dion:
As a tree estimator, if I went and we had two months worth of work backed up, prices went up because if it was going to take me away from another customer, I needed to justify the time. If I was going to have to work on the weekends, it was needed to justify the time. If we don’t have a job tomorrow and then no more work lined up, prices hit rock bottom because we need to eat next week. And that’s how most contractors are. So I want at least three quotes every time I do a project, not because I found a good contractor, I’ve got a roofer that’s done my last two roofs that I had done, he’s probably going to do the next one, but he’s going to have two competing bids. Because what if when I go to do that roof, he’s got six months worth of work lined up and my price will be jacked up? So I hope that answers the question of the confidence comes from competence, learned a little skills, and then the confidence comes naturally.

Ashley:
Dion, back to this deal, what were three things that went wrong with it that our listeners can learn from you? What are three things that mistakes that you made that you can tell them, “Don’t do what I did, but do this”?

Dion:
Three mistakes with this deal, the first one is even when you have a home inspector, you can find things that they can miss, and there’s a valid reason. The previous owner of this house had some rot in the framing that they had repaired. And that’s a two story, so that’s a fairly important one. It’s on the lower floor. And they had the siding done in that area. So the home inspector had no way to know that there was a beam missing that was held up by a 2X4 that had perfect siding cover.

Dion:
It’s a big scary thing when you think of framing, but it was probably one of the smallest expenses that I’ve had here. So expect more expenses than you find in your home inspection. Even when you get a 72-page detailed report, you are going to find things that maybe the home inspector couldn’t find.

Dion:
The second thing is I’ve always… And it’s funny I didn’t think of this. I’ve said this for a decade. All of my properties are between Tacoma and Olympia and Washington, but not in Tacoma or Olympia and Washington. I don’t want to own inside city limits. Different regulations, rental inspectors, those kind of things. Well, I’m in a new town called Port Orchard. I’m inside city limits. About three houses down in the unincorporated area, the permit process would’ve taken four or five weeks. There’s somebody here doing work and they’re done and they were done within a month and a half. Since I’m inside city limits, I’m dealing with a different entity.

Dion:
So before you invest in an area, and I’m not saying invest in or outside of city limits, I would say I would recommend reach out to contractors that work in an area that you’re going to invest and ask the contractors that have had to pull permits, “What’s it like to work with this municipality? Is this somewhere I want to invest or is this somewhere I need to pad my timeline because of that?” So my mistake was not reaching out to… And I’ve said it many times before because I’ve done it in the past, reach out to contractors and say, “What’s it like to work with them here? How long will this take?” And I didn’t do it on a property I was buying, but I’ve done it on properties I already owned.

Dion:
And the third thing, and this is the thing that I can’t stress enough, there’s two times house hacking is really important. There are a lot of people say, “I can’t house hack.” Well, these two times make it more important than others. One, if you don’t make a lot of money. For me to get started to get through that first 10 years since… Until the eighth year, I don’t think I ever made more than 50,000. In the eighth year, I made 61,000 off of my W-two job. It wasn’t until the last couple years they started making good money. As soon as my employer found out I was making more on rentals, they started giving me increases to try to keep me, which is another reason to have rental income. But I actually walked away from $2 million in golden handcuffs and don’t care. That’s how freeing cash flow is. I share that all the time with everybody. They had those handcuffs and I said, “Those are great, but I can do anything I want every day and that’s more important to me.”

Dion:
So house hacking, if you’re not making a lot of money, it’s probably what I would call the cheat code to wealth. And the second time house hacking makes a lot of sense is if you’re in a high cost of living area. So I invest in Washington. I mentioned my friend Millennial Mike. He invested [inaudible 00:25:40] because he can buy a $68,000 triplex and each unit rents out for $1,100. Or I could buy one duplex in Washington where the down payment is $68,000 and the cash flow is about the same.

Dion:
I’m house hacking for the third time. I house hacked a duplex to get started and get around the debt-to-income. About year six or seven, I house hacked a fourplex. I lived in the fourplex until last year and now I’m in this duplex and I’m house hacking so that I can travel.

Dion:
So the people who think they don’t want to house hack because they hear somebody like me, I call myself a serial house hacker, you don’t have to. It might be once or twice to get the ball rolling. But then, the best thing about house hacking is when you move out of your unit into your forever home, you get to rent that unit out, which could be the unit that’s paying your mortgage where you’re living.

Ashley:
So Dion, you’ve touched a lot on markets throughout the episode so far. So I want to get more into what are some tactics you use when you are identifying markets. Do you have kind of a mini little crash course as to some things rookies should look for when they’re identifying a market and trying to find where they should do their first or next investment?

Dion:
So everyone should have an elevator pitch on what your buy box is. When somebody says, “What are you looking for?”, you should be able to rattle it off really quick so that not only you know it well enough to speak it simply. So I can rattle that, but there is one metric that matters the most and I’ll talk about that after the elevator pitch. I want to invest in a market where I keep my properties at least 10 miles apart, so I’m pulling tenants from multiple sources. So I don’t have all of my units close together. They’re all within an hour, hour and a half so I can self-manage. But I want all of my units close to what are called economic drivers, sources of tenants. So a base, a port, college, hospital, Boeing, Amazon, large population, two or three of those at least. And so that’s the market aspect.

Dion:
When it comes to the physical aspects of the property, I don’t like tenant turnover. That’s one of the reasons why I use the binder strategy because happy tenants don’t leave, right? So help limit tenant turnover. I want physical aspects of the property. Normally, I want side-by-side properties because you don’t have noise complaints. You don’t have over-under like the one I’m in now. So I’ll have to be more concerned about sound or a plumbing issue here can impact two units instead of one. I want washer dryer hookups inside the unit because the tenant using shared laundry or a laundromat is waiting for a place to open. I want at least two bedrooms and usually a garage or carport because in Washington, since it rains so much, that becomes storage or gets you a better rent. So those are the physical aspects of the property.

Dion:
But we all have this kind of elevator pitch on which market I’m going to pick, but here’s the metric that matters the most. And this would determine whether I’m going to buy locally or at a distance. And even my friend who invests at a distance, this is how he did it. The most important metric, trusted boots on the ground. My friend that invests in Gary Indiana, you can see a property listing that looks great, but there might be a street that has eight condemned buildings and two good ones and one of those is the one you’re looking at. And the next street over, literally one street away might have 10 properties with two condemned buildings and you’re buying one with the eight that’s better.

Dion:
And so you’ll have less tenants run over better tenants. How do you know that if you don’t have somebody on the ground? I invest locally, I’m the boots on the ground. And I could manage from a distance because I put my systems in place living here. If I was going to invest at a distance, I would do what my friend Millennial Mike did. He had a friend investing for years, watched him, and then piggybacked on his network. So he had the trust of his friend who’s an investor. That person had the contractors, the property managers, the handyman, the agents, all of the elements that you need to have the trusted boots on the ground. So if you can’t go to the market to be those boots on the ground, you need to have somebody there.

Dion:
And the level of trust that I’ve heard referenced in the past probably here on this podcast is somebody you trust so much, you think they’re probably going to be at your funeral. That’s the level of trust that you want. And that’s what my friend Mike did, is he watched his friend for years and then he used his systems so he might not know the people that are in place on the ground, but he trusted his friend that was the investor.

Dion:
One of the main reasons I invest locally is I’m in a high cost of living area. So that’s kind of the last thing to look at, is what are the properties cost. My friend and his name’s literally Millennial Mike, which means he’s a millennial, he’s got that dopamine hit. “I want to buy three, four properties. I want to have…” This feel, he’s only been investing I think five years. He’s got 15 rental units, so he’s going much faster, right? I wanted the right amount of cash flow from the least amount of units, which meant one property, one duplex where the cash flow is over a thousand dollars a unit. So I had 16 units when I retired that were producing over 17,000 a month in cash flow. Less units. But two years between purchases I don’t have, I think, the drive to have the more transactions happening now.

Tony:
Dion, I really want to dive into the buy box piece and just the process for building that out-of-state team once you get back from this ad break. So hold that thought, we’ll be right back after this ad.

Tony:
All right, Dion, you’ve shared so much great information so far. And one of the questions that’s really sticking out to me is the buy box piece because I think for a lot of new investors, they hear the word buy box, they understand that it’s important, but the actual mechanics of creating that buy box I think can be a little confusing. And while you were talking, I actually pulled up the buy box for our first commercial deal that we were trying to buy. We wrote this down last summer, June of 2023. We ended up closing on that first commercial deal in December, so six months later.

Tony:
We wrote down that we wanted to raise no more than 1.5 million. Our market type was either an urban destination or a true vacation market. We wanted somewhere between 10 to 30 units on this commercial property. We only wanted seller financing or assumable debt. We wanted a value add opportunity. And then we had some targets for cash on cash and IRR. We ended up closing on a motel, a boutique property that was a $600,000 capital raise. It was in a vacation market, 13 keys, seller finance the majority of the profits. We checked all of these boxes for our buy box, but it took us failing two times first to try and raise capital for other deals before we really landed on that, that buy box had made sense.

Tony:
So I’m curious. Ash, I’m going to go to you first because I want to know what did your buy box look like and how did you land on? And then Dion, I’d love to hear from you. But Ash, for you, when you’re acquiring properties today, how do you build out that buy box for what makes sense?

Ashley:
Yeah. When I first started out, my buy box was literally what the investor I was working for was doing. So it was a very, very limited mindset as to I need to buy a property in cash because I didn’t know that you could actually go to a bank. But also it was, I knew that I wanted more than one rental unit in the property because I wanted less overhead of having different properties and I’d wanted more under one roof. So having a two to four unit was very important to me. And then also investing in the area where I was already managing properties for another investor because I was so familiar with the market. And also I wanted to be in the affordable housing range because that was the type of area there was more of a demand for housing than getting something luxury. And also starting out, I didn’t know a lot about rehabs remodel, so I was looking for turnkey properties.

Tony:
Dion, just really quickly, brother, just how did you define your buy box? Because I know you’ve got the binder strategy, we definitely want to get into that. Before we do, just really quickly tell us how did you create your own buy box and how can rookies replicate that process?

Dion:
So I think this is probably one of the most important things that we do as an investor. I take this from the Michael Zuber’s One Rental At a Time of learning your buy box, studying it for 60 to 90 days to learn what an average deal looks like so that you can hunt for one that beats it. And the lumberjack landlord told me one time, because I used to say, “Well, that means you get a good deal.’ And he says, “No, that protects you from getting a bad deal.” I thought that was great, but you don’t know if it’s a good or bad deal until you know what the average deal looks like.

Dion:
So here’s my twist on the buy box chronology. When you’re starting out, what are your resources? We talk about the end goal. What do you want? Financial freedom or bragging rights for a unit count? I want it to buy single family houses every couple of years because I understood it. Rent one out, lived there for a couple of years, rent another one. And in 10 years I’d have five properties. Well, in my area, single family houses don’t cash flow. They just don’t. And they didn’t have the resources to save 20 or 25% down for an investment property.

Dion:
So I learned about through BiggerPockets, small multifamily gets single family lending. And I went for the duplex. I didn’t have the funding to do a fourplex. I didn’t want to use FHA. I preferred conventional loans so I could save 5% down for a duplex. And I did a 5% down. So my buy box was duplexes in my area that when I move out and both units were rented, what’s my cash on cash return and does it beat the area average? So in some areas that could be 3%. In my area it was 10. And some areas like the Lumberjack landlord who’s in around the Boston area, he’s getting 25% on some of his deals. And so you have to know what your market is because you can’t say the market because there’s over 300 of them. You know what works in your market and what asset class performs the best.

Dion:
So I house hack and purchased a couple of duplexes, but then my resources increased. So I looked at a fourplex and did 20% down owner occupied on a fourplex. And then as my resources increased, my buy box also changed with all of the things I listed off earlier. But I can buy in more and more expensive places. As my down payment, closing costs, immediate repairs and money for reserves grew, I could increase what I’m searching for.

Dion:
And then as I started having that huge, to me, lump sum of cash in the bank, and to me half a million dollars was a huge amount, I had never seen more than 10,000 until the last few years when the cash flow from rentals was way more than I needed, that’s when I shifted my buy box to, I’m searching for another fourplex or I could self-fund a BRRRR, which is what I ended up doing. And so I think you need to look at what your end goals are, but what are your current resources and how does that impact your buy box because your buy box will shift as your resources grow.

Ashley:
Now Dion, you have mentioned the binder strategy throughout this episode. I know you talk about it on your BiggerPockets episode that you did, but could you kind of give us a brief overview of what the binder strategy is? And then also I’ve been told you’ve did some updates to the strategy too, so new and improved that maybe nobody has heard about yet.

Dion:
I’ve actually made several updates to the binder. So what I did is I spent about 10 grand and made a free course. So there’s no charge. I’m not trying to sell you on something, but if you go to diontalk.com/binder, it actually has how the binder works, how it works with section 8, how it works from a distance, how it works with a property manager when you close on a property, when you should use it again after the first time. My goal with the binder strategy is to share the information with as many people as possible because it helps the tenants and it helps the landlords.

Dion:
Most tenants live in fear of somebody buying their property, coming in, kicking them out, saying they’re going to rehab the property. Kicking them out, saying “I’m going to move in” or raising the rent so much that they have to leave. And so what I have today is I’ll do the quick Cliff notes version so we don’t make the video too long of how the binder works. I actually just did this. And it’s funny, I don’t feel good about this, but I’m doing this because Washington State is threatening rent control. So because of the threat of rent control, I did the binder strategy with my entire portfolio again.

Dion:
And so the threat of rent control is going to make me more money. That’s what I don’t feel good about. But the binder is… I called it a binder because it’s actually done with a three ring binder. Now you can do this through email and you can do it through texts. When I use it with section 8, I’ve done this through emails. I had section 8 actually tell me, “The most we can pay for that unit is 1,800.” I use the binder strategy, they agreed to 2,200. And that was a few years ago. Now that property is listed for 3,000 with section 8 because of the binder strategy.

Dion:
So the idea is the tenants and the properties that I buy are usually I’m buying them because the old landlord doesn’t want to kick the tenant out, hasn’t taken care of the property, probably hasn’t raised the rent. So they’re not making enough money to keep the assets that’s why I’m buying it. So a lot of investors will run the rents at where they’re at and it’s not a good-looking deal. But I’ll run the rents 10% below what area average is and then all of a sudden it becomes a good cash floating deal because so far I have not had an experience where the rent doesn’t go to at least that much.

Dion:
The front page of the binder is, and this could be the top portion of your email as well, is from Redfin or Zillow and it shows the property. It’ll actually show the current estimated value. I share it with the tenants and I say, “This is the property you’re renting. This is what it’s worth. This is what my property taxes and insurance are based on.” The tenant doesn’t care. Our expenses do not set rents. That’s something new investors usually get wrong. They think, “My mortgage is this, I need to charge this.”

Dion:
If our expenses impacted rents, a paid off property and a property with a mortgage would rent for a completely different amounts, but they don’t. The tenants don’t even know if you have a mortgage. I’m sharing this because it’s transparency. This is information the tenant can then go look up when I’m done talking so they can verify my information.

Dion:
The next page in is the fair market rents from housing or HUD and what their current increases for the next year to say, “This is what the housing authority would pay me for this unit.” Then the next few pages are the actual lists of rentals in the area.

Dion:
Now this is an actual binder that I just did about a week and a half ago and I’ll share the actual experience. Tenant is at 1,400, area average rents are 1,900 to 2,100. So if I go in as a landlord and I say, “Hey, it’s 2024, I’m really sorry they’re talking about rent control. So I’m going to raise your rent to $100.” I’m a jerk. $100 increase would make me flamed on Facebook. My tenant might leave, they might break something before they leave.

Dion:
But I go in and I share the binder strategy, I show them the front cover, I show them what fair market rents are for housing authority, I share them the other rentals in the area that are as similar as possible, same bedroom count, garage, no garage, whatever the tenant is in, I’m sharing them what they can then go and look up and I say, “You’re paying 1,400 area average right now. If you moved out, I’d have to spend some money, fix the place up. I’d probably get 2,100 because that would be the newest shiniest rental in the area. I don’t want you to leave and to make sure you don’t get too stressed out. I don’t want to raise your rent to 1,900. That’s not what we’re doing today” because that’s the first knee-jerk reaction they’re going to have as well. “You want to take the rent to.” And I say no.

Dion:
So here’s the magic question. Just say, “What do you think would be fair?” I’ve never had a tenant say, “I want my rent to go down,” or “It should stay the same.” I’ve had a couple of tenants say, “Well, let’s go up five or $600.” And I say, “That would be great. I think that’s too much. Why don’t we go up 400?” Because they see how the disparity is between where they’re at and what it’s going to cost them if they move and what I could get if they move.

Dion:
On average, most tenants will ask for about 60%, that if they don’t quite cut the difference, they get a little closer. Once in a while I’ll have a tenant ask for something less and it’s a conversation I could say, “Well, that does seem fair to you. Do you see how far you are away from area average?” And then they’ll come up a little bit more.

Dion:
It’s more common that they ask for too much. So this last tenant said, “Well, why don’t we go from 1,400 to 1,800?” And I said, “How about we go from 1,400 to 1,700? So we’ll do a $300 increase this year. Next year we’ll look at rents again. Maybe there’ll be a small increase.” Or maybe, and this is what a tenant did when I did the binder strategy about three weeks ago, asked for a two-year lease. It was $250 increase for her, and she said, “But I’ll do this if we do a two-year lease.” I’m totally happy with a two-year lease. I’ve got a tenant longer, less tenant turnover and she is protected from the rents going up next year. The idea with this is, if I went into the tenant or just sent an email to the tenant saying, “Hey, your rents going up a hundred bucks,” I’m a jerk.

Dion:
I have a conversation. Include the tenant in the conversation. Ask them what they think is fair, have educated the tenant on what the rents are. I’ve educated myself making the binder right? If I did the binder strategy, the tenants could use this. If you’re in an area where your rent is 2,000 and you find a bunch of rentals just like yours for 1,800, you should make a binder. Talk to your landlord and say, “Hey, here’s what everyone else is paying in this area. How about this year my rent goes down?” If a tenant approached me with that, I would understand the logic.

Dion:
My goal is I buy properties where the rents are significantly lower. I don’t have to kick the tenants out. I don’t have to do rehabs. Like I said, this is my first and last BRRRR because that’s not what I generally like to do. So this has been used by hundreds, I have hundreds of screenshots of people in the BiggerPockets Facebook forums saying, “Another successful use of the binder strategy.” And it was the most recent one was tenant was at 900, they went to 1,300. A $400 increase, which is in this case click like 30% or so, whatever the actual math is on that, with a happy tenant. Happy tenants don’t trash your property and happy tenants don’t leave. So my goal is to share this. That course, like I said, is free. There’s no charge for it.

Ashley:
And does that include the new updates that you have done to it? What are the new things that you’ve discovered recently for the binder strategy?

Dion:
Thank you. Yeah. So the things that I’ve discovered recently is I wasn’t using the HUD before the fair market rents. Here’s the math on the reason why I hadn’t even thought of it before. As fair market rents were going up 5 or 10% every year, section 8 will pay more, a little bit more. And so there’s two things actually that have changed. The first one is fair market rents. Thank you for asking because I have memory issues.

Dion:
But the housing authority, the HUD uses seven years of data, but they don’t consider the last two. So they look at these five years of the last seven and they get an average and they say, “This is what fair market rents are.” Well, in 2020 we had an eviction moratorium, a rent freeze, and could change rents on 2021. Rents spiked in most markets 30 to 40%.

Dion:
So I did the binder strategy there again because of a black swan event. And I experienced the smallest increase was 20%. The largest increase was 28. So 28 to 28% at tenants request. So watch for black swan events on when you’re going to use the binder again. But this year, look, go to the fair market rents. Maybe I’ll put a link. I can’t put a link in your comments. Maybe you guys can put a link in the description below on where the housing authorities get their fair market rents based on county and based on state. And look at the increase for 2024.

Dion:
I have the binder here. And so here’s one of the biggest reasons why I use the fair market rent now in the binder, is because of that increase in 2024, they were paying 1,643 last year. Because they’re now using 2021 data, it’s going to 1,987 for a two bedroom in my area.

Ashley:
So over a $300 increase per month.

Dion:
And basically how this is going to work is in the next six months, that will impact recycling leases through the year of 2024.

Dion:
And so here’s the second thing that’s changed with the binder strategy as well. If you live anywhere near a base or a college, BAH, basic allowance for housing for military in 2023 went up 12%. It’s going up 3% in 2024. So that’s kind of a big increase that you can also reference with your tenants when it comes to the binder strategy. So also paying attention to those other things impacting your local market that could tell the tenants what a more fair rent for both of you is.

Ashley:
Well, Dion, thank you so much for all of the information that you have shared with us today. This is an amazing episode for rookie investors to listen to.

Ashley:
So I want to recap some of the lessons that I learned. And for other rookie investors, here are some takeaways that you guys should be thinking about as we wrap up this episode. So using days on market as a filter for searching on the MLS, using an app to find contractors. Thumbtack was the example given. And then learning one strategy and sticking to it until you can afford to make mistakes. And in Dion’s example, he was financially free at that point. Creating a buy box pitch that has market and physical aspects to it. And then the metric that matters the most to Dion for analyzing a market is having a trusted boots on the ground. And then lastly, using the binder strategy for raising rates.

Ashley:
So if you want to learn more information about Dion, we’ll link his information in the show notes. You can check that out. You can also find mine and Tony’s social media accounts. You can find those there.

Ashley:
Dion, thank you so much for joining us today on the show. And if you are in the Real Estate Rookie Bootcamp, you may get to know Dion there. You can chat with him in the community member group. So Dion, thank you so much. I’m Ashley. He’s Tony. And we’ll see you guys next time.