BiggerPockets Podcast 037 with Aaron Mazzrillo Transcript

Link to show: BP Podcast 037: Full Time Income, Part Time Lifestyle Real Estate Investing with Aaron Mazzrillo

Josh: This is the BiggerPockets Podcast, Show 37.

You’re listening to BiggerPockets Radio. Simplifying real estate for investors large and small. If you’re here looking to learn about real estate investing without all the hype, you’re in the right place. Stay tuned and be sure to join the million of others who have benefited from BiggerPockets.com. Your home for real estate investing online.

Josh: Hey, what’s up everybody, this is Josh Dorkin, your host on the BiggerPockets Podcast alongside my wonderful cohost, Brandon Turner. Hey Brandon.

Brandon: Hey Josh, what’s going on?

Josh: You know, working, working. Just got back from a nice four day jaunt in New York for a wedding so that was nice.

Brandon: Nice. I like how you used the work jaunt. I don’t hear that word very often.

Josh: Well, you know. I like to expand my vocabulary.

Brandon: Good job, that was excellent.

Josh: For those people who don’t know what jaunt means, go look in the dictionary.

Brandon: You just made like half of our listeners feel terrible about themselves. Good job.

Josh: Oh you guys. Well, yes, so things are good Brandon. I’m doing well, had fun traveling, had fun seeing folks, and you know, back in the saddle here, cracking away, just released version 2.0 of the BiggerPockets mobile app, which is pretty cool for i, what is it? For iOS7 so very excited about that.

Brandon: Yes, fancy and pretty looking like iOS7 is.

Josh: It is. Yes, so anyone who wants to download that, go to BiggerPockets.com/app and you could download the free BiggerPockets iOS7 app and for you Android listeners, sorry.

Brandon: Sorry.

Josh: Yes, yes.

Brandon: We’ll there.

Josh: Well, one of these days. We’ll have an Android app.

Brandon: We’ll do a Kickstarter for that.

Josh: Yes, maybe that’s what we’ll have to do, but so listen, few weeks ago, we started doing this quote contest and encourage people to share on Twitter, G+, or Facebook, their favorite quote from the show, along with #BiggerPockets. Before we get into the show, we want to announce the winner of the quote contest from our last episode. This week’s winner was Mark Elegert and his Twitter account is @BLNK2010 who quoted, “Don’t bet on appreciation” from our Show 26 at BiggerPockets.com/Show26. This week, we’re going to change up the contest award just a little bit and up the ante some.

This week we want to encourage you guys to pick you guys to pick your favorite quote and tweet, Facebook share or G+ share using the #BiggerPockets for your chance to win six months of a free Bigger Pockets Pro account. We’re giving away six months of BiggerPockets Pro for free to somebody here who has I guess our pick of the best quote of the week. That said, a Pro account, in case you didn’t know, it allows you to post in the marketplace to use BiggerPockets analysis calculators, get analytics about who’s visiting your profile and blog a whole lot of other cool features like enhanced signatures and so. You can learn a lot more about that at BiggerPockets.com/Pro. Moving onto the meat of the show, we got a really, really good show ahead of you today.

We—now this thing is chockfull of excellent information and our guest is Aaron Mazrillo. Aaron is an investor in the southern California market who’s done just about everything there is to do in real estate investing. He was a speaker at the last BiggerPockets conference last year, in 2013 in March and he was a huge hit.

Brandon: That was 2012 year conference.

Josh: What year are we now?

Brandon: We’re in13.

Josh: Holy moses. Yes, it was in 2012. Don’t pay attention to me.

Brandon: Anyway.

Josh: Days just drone on. I’m kidding. I’m so not kidding. Alright so, Aaron was the speaker at the conference last year in 2012. He was still a huge hit back in 2012. He’s also—he’s very active on the BiggerPockets forums. Always working to help answer questions on the site. He’s usually there pretty much everyday so definitely check him out and as reminder of course, be sure to come check out the BiggerPockets show notes at BiggerPockets.com/show37 where you can ask Aaron any questions you want or just say hello. Every week, the conversation that takes place on the show notes is really awesome so definitely go to BiggerPockets.com/show37. You can pick Aaron’s brain about what he’s talking about in the show and with that, why don’t we move forward and get this thing going. Aaron, welcome to the show. Good to have you here.

Aaron: I’m excited to do this.

Brandon: Awesome. Welcome. Let’s jump into it. Josh, would you like to take the first question.

Josh: Sure I’ll gladly take that, Brandon. Thank you for being so generous.

Brandon: You know, I’m a generous guy.

Josh: Yes. Alright Aaron, seriously, what are doing man? What’s you strategy? What’s your focus? Where are you doing it?

Aaron: Well, I’m in Riverside, California and my market is in an area called the Inland Empire so that extends the eastern boundary of Los Angeles, city of Los Angeles and I go as far east as a city called Marino Valley which is just before you hit desert as you head in the California area. I don’t really go into Palm Springs of that area and I really don’t go much further south than probably Corona. There’s a lot of cities in the Inland Empire south of there, but I’ve never had much luck down in there so just central Inland Empire Riverside, California buying wholesale mostly. My game is cash flow. I like to acquire properties as rentals so I try to get something in escrow and then immediately something that I’m going to keep. Then immediately look for something that can wholesale to use that money as the down payment and I’ve been doing that for quite a few years now and it’s worked out really well.

Brandon: Now, I’m not really familiar with California so whereabouts—I mean where is this in relation to let’s say Los Angeles. It’s east, it’s just east of Los Angeles.

Josh: It’s east. It’s just east of Los Angeles.

Aaron: An hour east, yes. I can be at LAX in an hour from my house.

Brandon: Alright, and you’re actually finding—I like mean people are always going on the site from southern California saying I have to invest out of the area because there’s nothing in California you can buy. You’re not finding this to be true?

Aaron: If you look at those posts, you’ll see on the first one to just blast that out of the way. I hammer on people so many—look at those posts. Just search that, I hammer on people all the time. Why are you buying in Detroit when you can buy right here in Southern California.

Josh: Hey, it wasn’t me. I didn’t rip on Detroit. Note to everybody who’s pissed at me in Detroit. This is Aaron who made the comment, not me.

Aaron: Hey, if you live in Detroit, great. You know, but if you live in Southern California. Why are you looking Detroit? I don’t understand that. I see it so many times. It just drives me nuts.

Brandon: Yes, that’s always been my thing. I always say that within every major city, there’s probably somewhere within an hour or two you can go to invest and apparently, they should come to your backyard so we’ll be sending everyone.

Aaron: You know, there’s a guy, he used run a real estate club here in Southern California. He’s retired now, but he used to have this saying, “Why are you looking across town when you haven’t looked in your own backyard.”

Josh: Is that Tony?

Aaron: When you haven’t looked across the street and I believe that. It’s true. You can find deals within a half hour of your house, no matter where you look.

Josh: Yes was that Tony?

Aaron: Tony?

Josh: Tony?

Aaron: Tony? Oh Alvarez. No, it was a guy named Jack Fullerton who was a really instrumental in me making the right decisions and finding the right people so a shout out to Jack even though he will never listen to this. I don’t think he even knows how to use the internet.

Josh: Nice, well yes, I mean listen, there’s SoCal is, there’s tons of opportunity. You just have to know where to look. In fact, Arthur Garcia, who I believe was on podcast six at BiggerPockets.com/Show6. That was his focus as well. I’m sure you guys must know each other or something. Small town even though.

Aaron: You know, I know guys who live out here in the Inland Empire and they’re buying and flipping houses in Beverly Hills.

Brandon: Oh.

Aaron: If you’re in Southern California, you can’t find a deal, you’re just not looking at the right product.

Josh: Yes, for sure. Cool man. Alright, so you’re in the Inland Empire, you’re doing this buy and hold stuff. Are you a full time, I’m assuming that’s the case? That is yes?

Aaron: I think I have—I am full time real estate, but 100% of my income is derived form real estate, but I’m not the typical investor. A lot of these guys are out there and they’re working their butt off and you know. They’ve essentially created jobs for themselves and I didn’t get in real estate to create a job. There’s a saying, “An entrepreneur works 16 hour days to figure out how to stop working eight hours a day.”

Josh: Yes.

Aaron: I definitely realized that in the early years. What I did was got Quickbooks and I figure out—I tracked all my expenses down to the penny for a year, everything, then I divided it by 12 and I figured out okay, I need to make this much a month to live and then for the next three years I went out and just bought enough rental houses to cover that and then some extra and at that point, I really slowed down a lot and I started doing a lot more fun stuff. The stuff that I wanted to do, traveling, go on a lot of fishing trips, I trained a lot so I’m in the gym five, six days, and really enjoy myself with the benefits that real estates have provided. I don’t have kids so that’s, you know, there’s nobody after me so all the money I get, I can spend on myself so it’s not like I’m building something for you know, other people to pass onto.

Josh: You selfish bastard.

Aaron: I am a selfish bastard. Yes. I’m just not done spoiling myself.

Josh: I love it, so ok, so you are, you’ve built basically, I mean it sounds like a pretty nice lifestyle real estate business is what it sounds like.

Aaron: Well, I mean a perfect example is I went back and forth with Brandon for I don’t know how many emails about can you do this at nine.

Brandon: Yes.

Aaron: Absolutely out of the question. How about 9:30? Dude I do not get out of bed before ten and I have to set my alarm.

Josh: Must be rough Aaron, must be rough man.

Aaron: You know it’s lifestyle by design.

Josh: That’s awesome so what would you say a typical week, I mean, you know, a lot of investors are out there trying to do you know, 40-60-80 hours of real estate work. How work are you putting in these days?

Aaron: Maybe four-five hours a day tops, but a lot of that time is—we do marketing like a lot of the other guys on the site. You’ll see the yellow letters and stuff like that. We’re involved in the same stuff and when I say we’re, it’s just me and wife. I don’t have any other partners at this time so we do a lot of the marketing and a lot of the time I spend during the day is just follow up calls, comping out houses, the rental portfolio, I actually hired a girl to deal with all that so I don’t have many maintenance issues. All those calls go to her. I don’t deal with the lease ups, anything like that so. You know, I spend a lot of time messing around on Facebook and reading blogs on fishing and things like that. Real estate.

Josh: You’ll learn a lot about real estate from those fishing blogs.

Aaron: Well, you know, the beauty of that is and this is an interesting story and it’s a great tip for your listeners. Surround yourself with the type of people that you want to become. I have found that if you surround yourself with guys who sit on the couch and smoke pot. It’s easy to fall in that habit of sitting on the couch, smoking pot, playing video games all day, but if you surround yourself with guys who are going on you know, one week long fishing trips, they’re going to pull you up because they want you to go on those one week long fishing trips as well. Here’s the perfect example, a friend and I wanted to go to Patagonia and that’s the southern part of South America. It’s Chile and Argentina and we’re going to go this year and he flipped me a wholesale deal. He bought two houses for 140 each. He put one the market for 195, didn’t do anything to it. Got an offer for 220, the other one, he gave to me and said wholesale this, anything you get out of it, we’ll split and we’ll use that money to Patagonia. I wholesaled it for $10,000 so we each got five grand to cover our trip.

Josh: Nice.

Aaron: He didn’t have to do that. He could have listed, but he wanted to go on that trip me because I go fly fishing with him all the time.

Josh: Nice.

Aaron: He gave me a deal and we’re going to go.

Josh: Nice.

Aaron: They will pull you up.

Josh: Now do you also go skiing in the Alps because I’ll do—I’ll split a deal with you.

Aaron: I don’t, but I will go with you if you flip me a house.

Josh: To anybody listening, you want to go on a fun trip? Flip him a house.

Aaron: Tip, tip, flip me a house, we can go on a trip.

Josh: That’s great so speaking of flipping, do you actually do any kind of flipping house, house flipping or just really wholesale?

Brandon: Fix and flipping.

Josh: Fix and flipping, yes.

Aaron: You know, in the beginning, I flipped a lot of houses and that was my main business model and I bought from wholesalers. I think that’s easiest. In my opinion, in real estate, I’ve done a lot of different things. I think buying houses from rehabbers, I mean from wholesalers is the easiest way to get into this business.

I think being a rehabber is the easiest part of real estate because essentially, you just have to be a project. You can let a wholesaler do all the marketing, the negotiation, the contracts, the estimation of rehab, the appraisal, you know, they basically tell you, bring in this much money, spend this much on rehab, and solve for this and here’s your profit. You can hire a contractor, you can borrow money from a hard moneylender, you can hire an agent to sell the house for you.

All you have to do is be a project manager so that’s what I did and now I only rehab and flip houses if there’s a substantial profit involved. I have one in escrow now that should net about 60,000 and I did one earlier this year that we brought in about 90,000 from that. If it’s less than 50, I’ll probably just wholesale it.

Josh: Got you.

Brandon: How do you find, I mean, there’s a lot of crappy wholesalers out there right? I mean like I would say vast majority of them.

Josh: Not the people who listen to this show.

Brandon: Not the people who listen to this show, no.

Josh: Brandon is not talking about you.

Aaron: I would agree with Brandon, yes, there’s a lot of bad wholesalers out there.

Josh: Yes, of course.

Brandon: How do you find a good wholesaler? I mean, like, how did you find yours?

Aaron: You know, reputation, going to a lot of local real estate clubs and talking to—sorry, I get my calls into my office here and I couldn’t figure out how to shut my phone off so.

Brandon: It’s alright.

Josh: It’s all good, don’t worry about it.

Aaron: I went to a lot of real estate clubs and just listening and talking to people and tried to find the most reputable person I could and when I found that person. This was—this is a great tip, don’t do what I did, I met the guy at a luncheon and he, I said, “Look, I’m looking to buy a house and I got some cash.” He just wrote down on a piece of paper an address and I just said, yes, it’s sold. I didn’t comp it, I had no idea what I was getting into, but I just knew he had such a great reputation from so many people that said, “Yes, this is the guy to go to. He’s the best, he’s the best buyer in Southern California.” I actually bought that house and made 26 grand on my first deal.

Brandon: Wow.

Aaron: It took about five weeks so.

Brandon: Wow.

Josh: Nice.

Aaron: Yes, reputation.

Josh: Was that a flip? It’s sounds like then?

Aaron: Yes, rehab and flip and then after that I just started buying everything from and this was in 2006-2007 when most people were dropping out of the business and I was still buying and flipping houses.

Josh: Yes. Nice, okay.

Brandon: Do you—did you suffer the crash at all then, I mean like, during that time?

Aaron: It only affected me on a couple of the rentals that I held. Like, I bought two properties and I held onto them. I should have flipped them, but I was trying to build a portfolio of rental houses. I still have them today. They do cash flow, but I lost a lot of equity and ended up being upside down in them, but I’m getting good cash flow out of both houses and that’s net. When I talk about cash flow, I’m not talking about mortgage minus, you know, rent. It’s the net cash flow on them is—it’s enough that justifies keeping them even thought I’m upside down on both of them.

Brandon: Yes.

Josh: Got you.

Brandon: We’ll definitely touch on the cash flow thing later. I got that on my agenda to ask you about because I read some stuff on—that you had written on the site earlier so anyway, but before we get—what?

Aaron: Let me just real quick, sorry Brandon, let me talk about one thing that I think it’s important and especially in either a sideways or a down market. This is the mistake I made and it’s where I lost a lot of money is that I bought a product and I would flip anything from mobile homes to mansions. I’ve done it all. I was looking at a mobile home and one of my friends said, “Don’t buy, don’t buy it. I just did one, it’s a bad deal.” I had done bunch of them and I still to this day carry a lot of paper on mobile homes and it’s a great income source, but I bought a mobile in a senior park in Orange County which has about $850 a month space rent. Then the declining economy, a lot of the seniors, they’re invested in the stock market, their dividends go down. I really pigeon holed myself into narrowest buyer market there is and because of that we lost about 20,000 on that mobile home which is unbelievable, but we were only into this thing for about 40 and we ended up selling for, I think, 10 or 15. We really took a bath on the house.

Brandon: Ooh.

Josh: You’re talking about when you’re buying, looking at the demographics of the area, potentially things like you know, senior mobile parks and that kind of stuff.

Aaron: I just think you can’t go wrong with a three bedroom, one or two bath, single story house with a two car garage.

Josh: Yes.

Aaron: You just can’t go wrong with that product. It’s the most in demand product in the country.

Josh: Yes.

Aaron: It has the largest number of buyers that want it. It’s easy to rent. It’s easy to sell. There’s tons of financing for it so if you’re getting started in the business, if you stick with that, you really—you’ve beat the, you know, you’re 90% ahead of the game. It’s the best product to invest in, in my opinion.

Josh: Yes. That’s good advice, very, very good advice.

Brandon: Yes.

Josh: Alright, so let’s start kind of digging in a little bit and why don’t we start a little with wholesaling. For those people who are listening who don’t know what it is, really, really quickly, you know tell us what is a wholesale. How do you—what is wholesale?

Aaron: Okay, perfect example, I send you a marketing piece and you respond so Joshua, you call me up and say, “Yes, I got a house.” I’m looking for two things. I’m looking for equity and motivation. You have to have both. If you don’t have both, you might have tons of equity, but if you’re not motivated, it’s not a deal. I can’t do anything with you. You might be super motivated, you can be the most motivated person in the world, but if you have no equity, there’s nothing I can do.

Josh: Yes.

Aaron: I get that a lot from people. They go from real estate club to club, dragging around this deal where there’s no equity and they’re like, “How do I make a check out of this?” I see that a lot with new people on the site so look for equity, look for motivation. You get the property under contract and you have an assignable contract and the way I do that is with a simple clause, which says, “Buyers vesting to be determined in escrow.” That’s the clause I use it’s right in my one page contract that I send out. Once we get in escrow, then I might call Brandon up and say, “Brandon, I got this deal. I’m asking 150 on it.” I actually do something a little different and I say, “Hey, check out this house. Tell me what you’ll pay for it.” A lot of buyers don’t like that method. They’re like, “Well, you should tell me what you want.”

Josh: Yes.

Aaron: I don’t, I say well look, here’s the house, you tell me what you’re paying. A lot of times they’ll give me much more than what I would like.

Josh: Well, yes, that’s a great negotiation tactic.

Aaron: I’ve done multiple, $30-$45,000 wholesale deals because I’ve done it that way so I’d call Brandon, say, “Here’s the house, go check it out. Tell me what you pay for it and I haven’t seen it. I don’t go look at it. Some of the wholesalers do, but I don’t because I figure, Brandon is the one buying it, he’s the one that needs to go look at the house. He’ll go by, he’ll go look at the house, he’ll comp it out. He’ll tell me, “Yes, this is what I would pay and then I call up escrow and say, yes, here’s my buyer so they’ll send the grant deed to Joshua with the Brandon’s entity as the grantor or grantee.

Josh: Grantee, yes.

Brandon: You’re saying you never actually step foot inside these wholesale deals. In the last three-four years, I have done probably a hundred houses, if not more, and I have never looked at any of them or gone inside any of them. I never met any of the sellers. I do it all over the phone and I’m going to go one step further and say I’ve probably written less than five contracts.

Brandon: That blows my mind. Explain that.

Aaron: With Joshua, we’re negotiating for a house and I say, “Well look, I’ll give you a hundred thousand for your house.” He’s like, “Okay, that’s fine.” I try not to pay the closing costs and we used to always offer, “Hey, we’re going to pay all your closing costs.” Then, you know, I realized how much money that was so we went onto Ebay and we bought Monopoly money and every time I felt the urge to say, “Well, I’ll pay all of your closing costs,” thinking it was such a deal. I’d slap a couple of $500 bills on the table and I’m like, “Yes, I’m not going to do that anymore.” Keep some Monopoly money on your desk. It’s a great tip. Go to Ebay, get some monopoly money, put it on your desk and when you’re talking about those dollar numbers, throw those out. You know those add up.

Josh: They add up, yes.

Aaron: Look at it, it’s like, “Man, do I really want to do that? Do I want to give away all of that?” Anyways, I would make an agreement with Joshua over the phone and then I would just email escrow, here’s the seller, here’s the address, here’s his address, his email, his phone number, these are the terms that we agreed to. She types up the escrow docs and immediately sends them out because the escrow documents supersede the contract. We might have a signed contract, but the escrow docs go out differently and he signs that. That signed escrow doc is going to be more important than the contract that we originally signed so we’d have to go back and [Inaudbile][22:18].

Josh: Can you explain that in a little more detail? Why is that?

Aaron: Well, the offer is just the instructions for escrow, but it’s actually escrow documents that you know, title’s going to use, and then they’re going to record the deed and stuff like that so they’re more powerful than the offer itself. I just don’t even do it. I don’t want to send you an offer and wait for you to sign it and send it back to me. Maybe in that time you’ve gotten two or three more letters. You might have called a couple of people and got higher offers and then you say, well, I’m going to cancel. Now I don’t have you on escrow and I have nothing from you, but if I get escrow docs Fedexed out to you today, we make our agreement today, and I can get escrow to type that stuff out and Fedex it out today or tomorrow the latest and you get that. You sign it, you send it back, you’re in escrow, you’re tied up. You’re not going to go somewhere else, you’re not even going to consider talking to other people.

Josh: Interesting.

Brandon: What about like the earnest money? Do you have to put like a dollar down like they say or whatever.

Aaron: I’ve never done an earnest money deposit.

Brandon: Oh okay.

Josh: Interesting.

Aaron: We just wire them full amount so you know, it’s funny, even with REOs, I’ve never—I’ve done a bunch of REOs, I’ve never done earnest money deposit with REOs. I always tell them, “Oh, we’re just going to wire the full amount.” We’re waiting on escrow to tell us what that is and it’s always like a two or three week delay and I’ve always gotten out of putting in an earnest money deposit.

Josh: Alright, walk me through this because you know this is something that I haven’t heard anyone else doing this. I’m sure plenty of people do, but I just haven’t heard it so you now go, you’ve got, you know, you talk to me and I’ve got this house that I’m—I want to unload and you know we agreed to a hundred grand or whatever it is. You now go to your escrow company and you have them type up docs. They send that to me. I sign the docs. I then send those docs back and then what happens, like at what point do you start marketing it. How does the process kind of work from that point?

Aaron: Well, here’s probably where I’m different than a lot of other wholesalers as well too. I basically sell to one guy and he buys everything that I have and he’s a guy who rehabs and flips. He’s got a lot of rental properties and he always pays me a great me a great price. He never complains and for me that’s the most important. I have the philosophy that I got from the guy I learned to do the business from is, “You bought what I bought so don’t call me complain that there’s a failed septic system or whatnot because if I’d bought the house, I’d have the same problem so you bought what I bought.” He understands that so I will—as soon as I get an agreement from you, Joshua, I would immediately email him and tell him, “Hey, I got this guy. He’s on the hook for a hundred grand.” Again, I wouldn’t say that.

Josh: What would you pay?

Aaron: Yes, I’d just say, “Hey, I got this guy, here’s the address. What would you pay? It’s rented. The tenants in there are on a month to month, you know, it’s not a lease. It’s month to month and they pay well and then they’re a thousand dollars a month. Then he’ll email me back and say I can do a 120 on that. I’ll call escrow—I’ll email escrow and say, “Here’s the buyer. He’s in it a 120.” He wires in the—she types up the grant deed with his entity and then send the docs out. The seller signs the grant deed, get’s it notarized, pays the $10, puts it in the Fedex envelop, sends it all back. She deeds the property to him to my buyer. He’s going to wire in the 120 and plus his closing costs and escrow send me the check for the 20,000.

Josh: How long does this process take?

Aaron: I try to do all my deals in under ten days and that’s working days so I always tell people, “I can get you your money in ten days or less, but that’s working days so it’s two weeks.”

Brandon: Yes.

Josh: Nice.

Aaron: A little marketing right? If I were, today’s Wednesday, if I were to lock something up today, I would try to close by next Friday. I want to do it quick. You can’t steal in slow motion. You got to be fast.

Josh: What happens with a newer investor right? New guy says, “Oh, I’m listening to Aaron. This guy knows what he’s talking about. Sounds like a great idea.” He goes, he ties up a property, does the, you know, gets the closing docs, gets that all tied up then he can’t find a buyer.

Aaron: That’s a tough one. If you can’t find a buyer then I really think that the property’s probably not that good of a deal because there are tons of people out there starving for inventory right now in all markets so if you can’t find somebody to buy that, it’s probably not a great deal and you need to go back and renegotiate it and what I would say and that’s happened to me one time. I bought a house. The woman told me it was on a dirt road. She said they were going to pave the road and when we did some more research, called the city up, they said, “No, we have no intention of ever paving that road.” I went back to her and said, “You know, look, my moneylender—the guy who funds me, I’m not a rich guy, I don’t have pockets that drags on the ground. He told me the most he is willing to lend me on this house is this much so, you know, either you can agree to that and we can get this closed and I’ll get you paid.” Always focus on—when I’m negotiating, I always try to focus on the outcome for the seller. “Look, I can stuff your pockets with cash by next Friday, if you agree to this because here’s what we found out and if they accept it, then I get a lower price.” We go back and try to sell the house again.

Josh: Are there—so do you have any outs then, I mean you know, if you couldn’t find a buyer? You know, how do you renegotiate if the closing docs are already signed.

Aaron: I’m a buy and hold guy and I will rehab and flip so when I make an offer, I have never an intention to out. That one deal is the only I think I’ve ever backed out on and she did tell me they were planning on paving the road and the city said, “No.” That’s a pretty legitimate reason not to buy a house. I don’t want to own a house in a dirt road in an urban area.

Josh: Yes.

Aaron: Because I don’t have a contract signed and I just call her up and say, “Yes, I change my mind. I’m out. I’m not going to close on it.” It’s not an issue.

Josh: Okay, so that works for you. Now, what would you say again back to the new investor who goes about this and wants to try it. I guess it kind of goes back to if it’s a deal, then it’s going to sell.

Aaron: Yes, absolutely and this is really a relationship business. You guys know that. You’re real estate—a lot of us do business on our word between—if you and I Josh, bought a house, I’m sure we wouldn’t go to a lawyer and be like, “Yes, we need everything in writing about every possible outcome.” We would just have a friendly agreement, maybe shakes hands and say, “Hey, let’s buy this house. This is how it’s going to work.” I’ve done that. I have 18 houses-19 houses that I own with other people and some of them have multiple people involved and we don’t have very many written. I think three of them have written agreements so it’s the relationship business and I work with people that I really trust. I know nobody that I deal with is going to go behind my back and steal a deal from me because they look all the future opportunities they’re going to lose. A lot of new people that get so caught up on—you know, the documents and the, “Ow, I need to get out of this. What if it doesn’t work out.” If you make an offer, you should be embarrassed to make that offer. If you’re not, you’re probably offering too much.

Brandon: Yes, somebody told me that when I first got started and I never really took it to heart until maybe a couple of years ago because I was—when I would offer on a property, I would get nine out of ten of them that I offered on. There’s something wrong.

Aaron: You’re a great buyer.

Brandon: Yes, yes there. My agent loved me.

Aaron: The agent says, “Bring it to Brandon. That just loves to pay too much.”

Brandon: That’s exactly what it was. Yes, I was paying way too much and you know, one of those reasons was, I used to underestimate ARV like or the repair costs. I used to underestimate the repair costs like crazy. I’d be like, “Oh I could get this done for 20 grand.” Then by the time it was done, it would end up being 35. I know to a degree, I still do that to this day, I’m always way over optimistic and I have to get multiple, you know, different opinions. Do you have any, I guess, suggestions on guys like me? How do you find out? How do you know the repair costs and how do you know the ARV if you’re not even stepping foot in the home?

Aaron: You know, I think it just comes from experience. Being in the business long enough that—I’ve been doing this for about ten years now so when you’ve done enough houses, for me, I can look at the outside of the house. The outside is going to be a pretty good indication of what the inside looks like. If the lawn’s dead and burnt and there’s you know, dog holes dug everywhere and there’s a broken window. The inside is probably trashed even worse. I mean people generally don’t live like kings inside and live like, you know, peasants on the outside so if I look at a house, I look at the square footage, I have a pretty good budget or a pretty good idea of what it’s going to take me to rehab and flip a house and regardless of the market that I am in. Again, it’s just experience. If you don’t understand estimating rehab, go to Home Depot on a Saturday, walk around, talk to people, there’s free seminars. They’ll teach you this stuff. You know, go in and price out cabinets. I say a great place to start is with your own house. Look at your house, measure the square foot in the bedrooms and figure out what it’s going to cost to put carpet in? What it’s going to cost to paint? How much a new kitchen in your house would cost? Then figure out, alright, on my house, a total rehab, it’s a thousand square foot and it’s going to cost me 25 grand to rehab so my number’s $25 per square foot. If I use $25 a square foot on this other house, that should be a pretty good. You know, within reason, a good number to work with.

Josh: Yes, yes, that’s great and also, you know, just to give a little plug to the BiggerPockets book on estimating rehab costs from my J Scott. It’s a great book with lots of information to help out. Maybe you should read it one of these days Brandon.

Brandon: I think I.

Aaron: Maybe I should read it too.

Josh: It’s at BiggerPockets.com/FlippingBook or you can find it on Amazon. We sell it with out BiggerPockets book on flipping houses so.

Brandon: What about ARV, determine what it’s going to be worth in the end? Are you just doing county rec? I mean, Zillow, or I mean, what are you doing to find out the value?

Aaron: Well I have access to the MLS and being in real estate and a real estate investor and not having access to your Multiple Listing Service, I would say would be the equivalent of being a plumber and not owning a wrench. You might be able to fix those pipes with your bare hands, but it’s not going to be fun.

Josh: Do you have license or do you just have people?

Aaron: I am a licensed real estate broker and I disclose that to all the people that I do business with. It’s actually on my mailer so I put in there that I’m a broker, but I’m a cash buyer, I’m not looking to list your house. I think I listed and sold one house that didn’t belong to me. Just not a business—you know as a broker, the one house that I listed and sold, you sit at the closing table, theoretically and you see a grant deed to a free and clear house go across the table on way and a big pile of cash go across the table the other way and the end result of that is you get a tiny, tiny check that’s taxed at the highest rate. I don’t why anybody would be a real estate broker.

Brandon: That’s funny. Yes, that’s really good. I mean people ask that question all the time on the site, like should I get my real estate license, should I not, and I always say the vast majority of our guests, anyway, say that you should and I’ve said that before.

Aaron: I think you should. Yes.

Brandon: Yes.

Aaron: I think being a real estate investor, you’re a professional, it just adds to the credibility, but you know, use it smartly. Be wise about it and there’s a lot of other things you can do when short sales got popular, I jumped in and did a bunch of those. Because I’m a broker I was allowed to do that. I did a bunch of short sales and made a grip of money on it. It was a really fun strategy that we did for a short period of time, but then I heard the FBI started investigating these people, that’s when we backed off—I don’t really want any part of that so I got out of the short sale business. At the time, it was a very easy way to make some extra money.

Josh: Yes, yes. Alright, so motivated sellers, you know, you had mentioned yellow letters, what other techniques do you use?

Aaron: I’ve done everything from radio advertisements to signs on the side of the road, bandit signs, door hangers, my truck was all painted up at one time. I’ve done tons and tons of different strategies. I find that mailing out letters or postcards, for me is the easiest way to hit the exact property that I want to buy and not have any. Like with internet advertising, perfect example, we used to do spam before spam was illegal. We sent out millions of emails a month and I’ve averaged.

Josh: You son of a. That was [Inaudible][34:56].

Aaron: I just said, you know, we hired a guy to do it and it was—it cost us probably about $4,000 a month to send a million emails a month and it would just hit everybody and I guess it would go by IP address or something, I really don’t know how all that works, but he would hit our market. We’d get about on average, a 150 leads a month, but there would be a 130 people that were just, you know, mobile homes in parks in the middle of the desert, just real crap, junky leads and I didn’t want to waste my time pre-screening all those calls so I do direct marketing for properties I want to buy.

When my phone rings, I know that the seller might be motivated and there might not be equity, but essentially that’s a house that I would be willing to own because it’s two to four bedroom, 800-1,500 square feet. It was built after 1940. It’s a single story house. You can—in California and I know some of the markets like Texas, it’s a little bit more difficult to get that data, but I think you can buy that through, there’s some people who talk about list servers. Our list brokers that will say the information and so we market to people that they own the type of property that I want to own.

Josh: That’s really, really, really good advice. I think you know, if you stop and ponder it a little bit, I, you know, is there any better way to target people with the exact specs that you’re looking for than direct mail. I can’t think of them. I really can’t think of any other way that would potentially be—yes, I guess you can do door hangers on those same properties, but you know, otherwise, I mean, that’s really about it. Isn’t it?

Aaron: Well, that’s why I really don’t consider myself a real estate investor. I consider myself a marketer who invests real estate because marketing is my job. I don’t sit here all day long working in real estate. I spend the majority of my time working on marketing, trying to write good letters. Putting together good copy, I spent a lot of time reading forums that I have to do with real estate copy and reading on BiggerPockets, people are sending letters. One of my favorite things is to go to the top right hand corner. I mentioned that a lot of blog and a lot of posts, “Hey, why don’t you go to the top right hand corner and search for this.” You know, go and put in yellow letters there and you can write a book on information available on BiggerPockets, just on the content for yellow letters. There’s a lot of great information there.

Brandon: Are those motivated sellers calling you right there?

Josh: That was what I was going to say so. His phone doesn’t stop.

Aaron: Yes, that is, that’s a 951 so it’s a Riverside caller.

Josh: Nice.

Brandon: Nice.

Aaron: It’s like this all day, but it’s the number mail—the quantity of mail that we send out keeps the phone ringing.

Brandon: You’re sending out yellow letters, I want to go into some detail on this. We did a lot of this with our podcast with Jerry Pucket, I’m wondering what are you doing specifics, in terms of yellow letter response rate. I mean are you tracking? How many letters are you sending out in order to get back a call and then how many calls do you take in order to make a deal happen? Do you have those numbers?

Aaron: I—you know, I don’t. I used to have—I had a partner before and he had developed some in house software and it went nuts. It tracked everything down to the hundredth of a cent on what we spent and all. That information was really cool to look at, but at the end of the day, you know, I didn’t see the grand value in that. Knowing that oh, I need to send 500 letters to get ten calls to buy one house. I just can consistently send on minimum a hundred letters a day. I buy a lot of houses and I don’t think that, you know, if I knew that well, if I send a hundred letters a day I can buy a house a week.

That’s great information, but being a single guy working this business, you know, just me and wife and she doesn’t answer the phones, I couldn’t handle the volume of calls if I got more than what I’m getting now so sending two hundred letters a day is not going to give me any greater return because I can’t stick with—I can’t keep up with what I have and I don’t want to hire somebody because I don’t want to—I don’t want a job. I don’t want to be responsible for giving someone else a job. Now, I’m not concerned about feeding myself. Now I’m concerned about feeding this person’s family and making sure there’s enough income coming in to take care of them. I don’t want that. I want to be able to leave tomorrow on a trip. If somebody calls me and says, “Hey, let’s go here.” I can go, I don’t have to worry about it and that happens quite often in my life where we’ll just. Perfect example is a guy emailed me two days ago and said, “Hey, I found this deal, let’s go to Cabo, fly fishing for four days so I immediately responded, “Yes, I’m in. Let’s do it.”

Brandon: Nice.

Josh: Sounds good.

Brandon: Oh no, I can’t remember the question I just had. Oh yeah, I got it so.

Josh: Early Alzheimer’s.

Aaron: You know, the sad part is, is that the faces Joshua makes and look at—people can’t see this because the video interaction is the best part of this podcast.

Brandon: I know, people are missing out here. Alright, the question I had was so postcards versus yellow letters and are you doing them yourself? Are you printing them on your little, you know, Canon printer you got from Walmart for $30 or what are you doing?

Aaron: It’s a Hewlett Packard.

Josh: Nice. Something Walmart brand.

Aaron: I used to outsource all that stuff when I had another partner and we were going gangbusters we had a couple of girls doing all of that stuff. Now I scaled back everything, I broke up with that partnership. I basically just fired him because he’s a great guy and I really enjoyed doing business with him, but I got tired of giving away half. If I do less work, I can essentially make the same amount of money if I keep it all.

I just got—in January actually I was on vacation in Thailand and India and I was gone for—I was supposed to be gone for four weeks and about the three and half week into this, I just decided, “I don’t think I’m going to go back to the states any time soon.” I emailed him and just said, “Yes, I’m not coming back for another two weeks.” I stayed longer and then I came back and I just never went back to the office.

I just said. “Yes, I’m over it dude. Let’s wrap it up.” Yes, we do everything in house. My wife and I take care of it all. It’s really simple. It doesn’t take that long to do.

I just print out one page letters and I think you should do a combination of letters and postcards and there’s no magic formula. A lot of this is your letter getting to that person on the day they decide to sell because I’ve talked to a lot of people who say, well, I got four letters last week, but they called me. It’s not because of what my message said or you know, sometimes it is, but more often than not, it just happens to be that they got maybe tired of getting letters and they got mine and just said, “The heck with it. I’m over it. I want to sell this house.”

Josh: Right.

Aaron: You should do. The least expensive way to get a lead is through a postcard, obviously. Very inexpensive to mail postcards, you can do a high volume at low cost. I would recommend starting with postcards and then when you get leads that come in, that you don’t convert switch them up to a more intense letter campaign. Maybe with the one or two page letter, attacking some of those points that they brought up in the conversation you had with them more or just tying it into the original postcard and then maybe send them once a month for four-five months. If you don’t convert them at that point, then switch them back to your postcard campaign where you’ll hit them every six months.

Josh: Let me cut you off here. Alright, so you had mentioned using your letter to respond to some of their, you know, counterpoints on selling to you. Sounds like you’re individualizing those letters then, I mean, are you pointing out a hundred letters a week that are completely individualized like that.

Aaron: Well, there’s only so many reasons why people sell so one is they have a bad tenant, another one is they rented the property, well in their opinion, they’re rented it, but they never got to rent to a relative so they allowed a relative to move in and freeload on them.

Josh: Yes.

Aaron: You might want to write a couple letters that address those individual situations, maybe the house needs a ton of repairs. Maybe they’ve gotten some code enforcement problem. Maybe they’re having problems with the neighbors, whatever the situations are in your market where you hear these things consistently that’s allowing you to buy houses. I have a woman, she has a ton of credit debt and she wants to sell the rental house to pay off the credit debt. The first thing I told her was why don’t you just refi?

She’s like, “Well I have this debt and it’s not allowing me.” I’ll try to help people out before I move their equity onto my, you know, asset list so, you know, you might have a letter that specifically written for people who have a lot of debt. Then you just drop that person’s name into a spreadsheet associated with that letter or that motivation. Then you can mail that whole list at one time so I just use Excel, real simple. We used to have an Axis Database and it tracked all the different campaigns. I just use a simple Excel spreadsheet for my different campaigns and you do a mail merge. It’s so simple and easy, anybody can do this. You can go out in Youtube and watch videos on how to do a mail merge. It’s extremely easy to set up a marketing campaign.

Josh: Yes, that’s great and in terms frequency, what are you doing with that. You’ll send out your yellows, your postcards, how often are you sending, how often are you hitting these people?

Aaron: Postcards, I like to do four times a year so if you get a list of—say you get a list of 13,000 names and you mail a thousand postcards, which will cost you probably about $500, you mail a thousand postcards a week for 13 weeks then you can start those people over again so you can hit them a list of 13 names is good for four hits a year. Then when they call, if you don’t close them, move them to a more intense letter campaign and mail those people once a month.

Josh: Got it. You had mentioned acquisition of these names so are you buying from list source? The website with list source? Or are you using other sources for your lists?

Aaron: I get them from the title company so the title company provides me a list and I don’t know if that’s available. I think in Texas it’s not. You can’t get that because it’s a non-disclosure state, something like that. Here in California, I can just call up or email the title company and they’ll actually send me a list.

Josh: Yes.

Aaron: They can scrub it down pretty good. They can’t get you trust deeds. They used to be able to give us that so we would ask for a list of names where they hadn’t had a trust deed or court in ten years, which means they hadn’t borrowed any money against property in ten years. We can’t get that anymore; however, you still can buy those names from list source.

Personally, I found that the two lists, there just wasn’t any big difference in the number of return mail between the two. The number in next years was pretty consistent regardless whether I paid for list or got it for free. Then I use, I actually went on Fiver, I don’t people use that or not, but F-I-V-E-R-R. It’s just a website where you can hire people to do stuff for you and I hired some guy in Pakistan to create a bunch of SQL queries and so I installed a SQL server on my computer and run a bunch of SQL queries against the list and I can scrub the list in a couple of minutes.

Josh: Nice.

Aaron: I can scrub the list of 16,000 names in a couple of minutes and it’ll spit it out to a list of ready to be marketed to names.

Brandon: I’m confused. I am not a techie, what does that mean?

Josh: It’s just a database. It’s just basically, you’re querying a database and you’re saying, “Hey, give me these criteria.”

Aaron: Yes, so here’s a perfect example, say you have a mailing address so you write a SQL query which would check for repetitive mailing addresses. If mailing address on line 1A is equal to line 2A through whatever, you know, and the numbers at the end of your list then it would move those names to another list and those would be multiple property owners. People who own more than one house, you don’t want to mail those people. You know, if you hit a guy who has ten houses, you don’t want to send him ten letters.

Brandon: Yes, that makes sense.

Josh: Yes, I used to use title companies as well when I was an agent in LA and it was great. It was easy. It was free. You’d just tell them what you want and they would—they’d provide it for you. Obviously, you know, you don’t want to abuse the privilege, but if you’re closing deals with them, then you know, they’re more than happy to help you with it.

Aaron: Yes, absolutely. Again, relationship business.

Josh: Yes.

Aaron: If you’re doing business with the people and they like you and you know, you’re putting money in their pockets, they’re going to be more than happy to give you a list of names to help you with your business so they can more money.

Josh: Absolutely. Alright, so wholesaling, let’s jump back to it for a second here. Do you think new investors should begin with wholesaling or do you think that there’s other strategies they should focus on.

Aaron: Real quick, Brandon, you look really intense.

Brandon: Thank you.

Aaron: Did I say something that you’re just like really dwelling on? I can help you out with?

Brandon: I honestly was. No, I was sitting there thinking. I’m like, I wonder, I got to call my title company later and I know this one lady there. I have a good relationship with her. Like, I was totally playing that whole scenario in my mind of what this afternoon is going to look like so.

Aaron: Okay, good, good.

Brandon: Well, no, this is really good.

Aaron: I’m glad you’re getting—at leas you’re getting something out of this.

Josh: I will tell you Aaron that not a show goes by where Brandon and I have those faces and we look at each other

Brandon: Yes.

Josh: You know, we look at each other and you know, we do write notes to each other in between so we can communicate and not disturb the conversation, but there’s always a wow that was great. That was a “good idea” kind of moment in every one of these shows so.

Brandon: Yes.

Josh: Sounds like you busted him.

Aaron: Okay, so no problem. With wholesaling—you asked me about wholesaling and I definitely want to address that. I think, in my opinion, wholesaling is the top of market. I mean, you’re at the top of the pack. If you’re a wholesaler, you have good deal flow and that’s key in this business.

A lot of people struggle with deal flow so they’re always, well, I got this one going and I’m looking around for something else or if they’re trying to make a deal out of something that’s obviously not a deal. The only reason they’re doing that is because they don’t have enough leads so they’re so focused on something that is not a lead. It’s really garbage and I’ll—you’ll see me posting on the site about that sometimes. I don’t mean to come off rough, I’m a pretty happy go-lucky guy. [Inaudible][49:38] a lot of comedy into everything.

I—you know, I’m laughing on my end. You know, wholesaling, you have to be an expert in five areas to be a really good wholesaler, marketing, negotiation, contracts, estimating rehab, and appraisal because you have to put together a deal. You—first of all, you have to put together a good marketing piece to get people to call you or to respond to your marketing piece. Then you have to negotiate with the people to be able to buy the property at a deep enough discount to put a spread in there for you in the profit for the person you’re selling the house to. You got to be able to write up the contracts, estimate the rehabs so your buyer knows how much they should be spending on the house and then what the household is ultimately worth because everything starts with ARV in this business.

Everything starts with the After Repair Value and you just deduct from there so I would never recommend people start as wholesalers. I think a lot of people say I’m going to be a wholesaler because they have no money or they feel like it’s the easiest way to do the business without getting any liability for themselves. They just see it as a quick way to a check and there’s plenty of people who go out and make money, but I don’t think they’re going to be able to build a sustainable wholesaling business that’s going to produce a good income for them unless they learn all these other five areas that I addressed earlier and learn them well. That’s why I think it’s the easiest thing to do and I said it before is to be a rehabber.

Just go out be a project manager, get inside on the jobs, learn all about rehabbing and flipping houses and then step up to wholesaling. You’ll be a much better wholesaler, you’ll be able to create much bigger spreads for yourself, you’ll pass along great deals to your buyers, and you can cherry pick the houses you want to keep as ones to rehab and flip or as rental properties. That’s exactly what I did, I rehabbed a lot of houses before I stepped into wholesaling. I got into wholesaling because we were able to—we became great marketers. We studied a lot of marketing and a lot of negotiation and I was able to elevate my deal flow to the level that I could pass along a lot of houses to other buyers and get checks, but still rehab and flip the really good deals. I was ultimately trying to build my rental portfolio because I knew as just a wholesaler, it’s a job.

Brandon: Yes.

Aaron: I had no sustainable income, it was check to check to check, right, as just a rehabber. You’re just you created a job for yourself, all you’re doing is you know, going out, you’re rehabbing a house. You’re working for a payday, but with rental properties, you don’t have to do anything to get paid. You don’t even have to be in this country and every first of the month, your bank account will fill right back up and replenish itself. That was my focus is to get out of the rehabbing to get into holding the rentals, buy and hold as many houses that I could that would produce enough income for me to live my life on my terms and then really enjoy doing the rehab and flipping and the wholesaling. A lot of times now, I’ll just pass along a house for a 1,000, 2,000, 5,000 ARV check and I’m okay with that because I don’t want to deal with the house and I’ll take the pay day.

Brandon: Yes.

Josh: Yes, that’s great. Alright, let’s move towards that, the buy and hold and watching the checks come in. You know, what do you look for in a rental? I’m assuming, appreciation is not something, you’re not a gambler. I’m assuming you’re somebody who’s looking for a steady flow of cash, yes?

Aaron: Yes, I want, I want a good rentable house in a working class neighborhood. I find that those people move the least so a real good blue collar neighborhood. Those people move the least. They stay long term. They set up roots. They fill the garage with crap. They get their kids into the local school and they never go anywhere so my ideal rental would be a three bedroom, two bath, single story, about 11-1,200 square foot, on an average sized lot, and for me that’s probably about 6,000 square feet with a two car garage and a good school district. I think that’s absolutely the best rental house you can own and the key to that is just getting the good financing. That’s really the most important thing is to find the good financing.

Josh: Oh ok, and are you—we’ll talk about in a second, how to find the good financing, but do you have any criteria in terms of you know, how much cash flow a property should have before you buy it or what are you looking for?

Aaron: Yes, well, I’m looking on any cash I have into a deal. I’m looking for a minimum of 20% return on my cash into it and I prefer it to be closer to 30 as a minimum and as far as cash flow out of the house, I would like to have a $100 a month minimum net cash flow, but for me to get a $100 a month, I really have to be into the house really light or to accept a $100 a month, I have to have almost no money into it. I’ve actually done a lot of deals where I’ve been paid to buy the house because of the way we structured the financing.

Josh: Got you.

Brandon: That’s pretty nice, can you explain that a little?

Aaron: Yes, here’s a perfect example of one of the first deals I did as a buy and hold. I like seller financing. I think if you’re not offering seller financing as the first strategy when you have a free and clear house or a house with a really low mortgage then you’re really missing a big opportunity because I own a lot of seller financed houses. This guy had a $120,000 house. He had lost his tenant, had to evict him, somebody had broken, stole the cooper plumbing out of the house.

The lawn went brown because they couldn’t turn the water on so the city started fining him for a bad lawn. He response marketing we sent out and at that point, he was about ready to let the house go to foreclosure and just get whatever net he would have gotten out of the foreclosure sale because he only owed $35,000 on the house. What I agreed to do was buy the house for $95,000. The way I structured it is to take over subject to his existing first loan. He had a $35,000 first on the house that was really old.

It was about 15 years old at the time so that means high amortization right? There’s a lot of that monthly payment going towards principal reduction so I said, “I’ll take over your first at 35,000. I can’t give you any money today because the house needs a ton of work and I got to go in and do all that and pay the city fines and deal with all that stuff.” There’s going to be no cost to him. I would pay for everything, but I couldn’t give him any money; however, I would protect his equity and I would give him a third position note of 60,000 so I’m basically giving a retail price. If you figure $120,000 house that needs work and I’m paying 95 for it, I’m like 80 cents on the dollar without repairs being considered so I’m really giving him a premium price.

I said, “I’ll give you a note for 60,000 on your equity, but because I can’t make any payments on that, I really got to get the house fixed up and I’m going to need to borrow money to do that. I took a $30,000 loan from a private lender, just a friend of mine. I put that person—because that’s cash. That’s more important than equity in my opinion. I mean cash is a real thing. Equity is a myth, right?

You can’t convert equity to cash unless somebody is willing to do something so I put a $30,000 second on there. I fixed the house up. I used the 30 grand for the rehab for the closing cost and that came to about 20 grand so I got a $10,000 check at close escrow. Then the seller’s equity went into third position and I presented it to him like this.

I said, “Look, as the house sits now, you’re making payments about 350 a month on your principal and interest payment. You have taxes, you have insurance, you have maintenance, and landscaping and all this other stuff you’re not paying for is probably going to cost you somewhere in the neighborhood of $500 a month, but essentially, you have to go out and earn about $600 a month, pay taxes on that be left with 500 to then hand over to your mortgage—you know, the tax man, the tax collector, the insurance premium. You got to pay all that so really by me just taking this house over and protecting your equity, you’re getting about a $500 a month net pay raise.” He agreed with that.

He’s like, “Yes, that makes sense.” I said, “Ok, so I don’t need to make you payments. You’re already getting a $500 a month pay raise because you don’t have to pay all those other stuff on that vacant house. Let me have a few years to recoup some of my investment that I’m going to put into this house. He said, “Okay, what do you want.” I said, “I said, well, I’d like to do five years.”

He said, “I can do that.” We went five years no payments and then when I did start to pay him, it was going to be $500 a month until it was paid in full and his response was, “Well, I’d like to be paid back quicker than that.” I said, “Okay, for the first five years, I’ll give you $500 a month and then for the—I’ll pay you $600 a month until paid.” He’s like, “Yes, that works for me.” I got the house, I bought it for essentially 95,000.

I took over the first position loan at 35, which was rapidly amortizing down. I borrowed 30 grand from my private lender. Recorded that as a second against the house. I used the 30,000 to rehab, fixed the house up, bring the house current, pay the code enforcement violations, put 10 grand in my pocket. I rented the house out for about, I we’re at 1,350 a month. It was netting just over $500 a month.

Net, net, net, net, cash flow on that house and had no payments on this third until five years down the road and when I do start to pay him, it’s going to be to be principal only payments so every payments is a 100% principal reduction. I’ve done several deals like that and I really like that strategy, but anything seller financed, I actually have a house in escrow now. It’s a six units apartment building here in Riverside that I paid half a million for and I put 10% down. He’s given me 90% financing on it and that should cash flow about $1,000 a month when we close escrow.

Brandon: Nice and you said like, net, net, net, net. How do you figure out, like for those people, I mean that’s a mistake a lot of people do. They take the total income minus the mortgage and that’s what they think is their net cash flow, but it’s really not so how do you determine it?

Aaron: You have VIMTM and it’s vacancy, insurance, maintenance, taxes and management. Those are your five expenses and we budget in management even though I self manage. What if I want to go to India for six months. Somebody’s got to manage the property so I have that management number built in there so I could turn it over to a property manager if I wanted to so I budget in, again, it’s taxes, maintenance, vacancy, insurance are you five expenses that are associated with a rental house. They’re real expensive. If you’re ever looking at a prospectus, you know, somebody’s trying to sell you this rental house and they’re telling you, oh it’s going to cash flow at $200 a month, look for the vacancy factor, I guarantee you it’s not in there.

Josh: Yes.

Aaron: Check and make sure, hey, you know, I’m going to have vacancy of one month a year, 8.33% so that’s one divided by 12 months, one year divided by 12 months. It comes out to 8.33% and that’s going to eat up your cash flow. Now you might not have that in your first year, maybe the tenant stays two or three years, but then they move out. You got to go in and clean the place and get it re-rented. That might take you two or three months. You have now realized that vacancy factor.

Josh: Now, what about cap x that’s certainly something that people want to plan for. How do you actually plan for expenses like new roofs and boilers and things.

Aaron: When I buy a house, we go in and do everything up front. We’re going to go in and check the roof, check the water heater, and that’s really the one that gets me the most is the water heater or sewer lines. I always get beaten up by the two of those. You know, sewer lines, you could go in and scope them, but I’m not going to spend the money on that. I usually just take the risk and it does happen, but water heaters, we always check those. Those go, you know, last year was the year of the water heater. I must have replaced five of them. We buy scratch and dent so you get a much cheaper and I recommend looking for a place in your local economy that sells the scratch and dent water heaters. We certainly don’t need a beautiful looking water heater in the garage, right? It just needs to boil water.

Josh: That’s a good tip.

Aaron: Yes, up front, we’re going to go in, replace everything, fix everything. We do tile floors in all the common area, that’s kitchen, hallways, bathrooms, living room, all tile, and then in the bedrooms, we put carpet. We call that islands of carpet and the reason why we do is that you know, the kid in one bedroom destroys the carpet well, I can just go buy scrap carpet and replace that and I don’t need to do the whole house over. It doesn’t all have to match. Bedrooms can have different color carpet so you know. We do all that and then off the top, every month off the top we take 10%. We put that in a reserve account and I’m probably one of the few people who actually does that, but I have my assistant, she handles all the rent collection and she does the books. She takes 10% puts it into a separate and then we use money from that to pay for repairs and pay for the property taxes.

Brandon: Nice. You do all your own maintenance or do you hire maintenance guys to do stuff.

Aaron: I have a licensed general contractor and this is a great tip for anybody on the call, I have a 1-800 number that I use. The tenants call the 1-800 number. I never take that call live. There’s no reason why you should ever take a maintenance call live. Let’s say the house is burning down, why would they call you? Brandon, do you have a fire truck? Let’s say the house has been robbed, Joshua, are you a crime scene investigator.

Josh: Wow, I play one on the side.

Aaron: What are we going to do for these people, right?

Josh: Yes, no, no, of course.

Aaron: Call 911, why are you calling me? The house is on fire you should not be calling me right? I never take maintenance calls live. There’s nothing they need that needs to be that affects my time that it needs to be done today. It goes to a 1-800 number, which then gets emailed to my assistant. She listens to the call, she contacts the—she creates a work order, sends that to out general contractor, then he makes an appointment directly with the tenant because I don’t want to be involved in that. I don’t want to have to be there and you know show up or orchestrate between these two. I let him call her and then they figure it out. He goes out and takes care of the problem and then sends me an invoice and I can pay him via bill pay online. That’s how I’m able to do this and still be on the beach in Thailand for six weeks.

Brandon: Yes.

Josh: Nice.

Brandon: What I like about that is you kind of took yourself out of the equation like you’re not a wheel in that whole equation, you’ve removed yourself and that’s cool.

Aaron: That’s the goal behind my businesses. I call it property management from the beach. If I can’t do it on the beach then somebody else should be doing it so I want to be in another country, you know, on vacation, enjoying myself and not be a slave to my rental properties. I am not building a job. I’m building, you know, money, I’m building a passive income source so I don’t have to work and that’s why I did it that way and it works really well.

Josh: What about evictions or anything like that? Have you ever had to deal with those and if so remotely?

Aaron: I used to do them myself, but I don’t do them anymore. I used to do all my evictions, and I haven’t—I don’t have that many and a lot of that comes form just tenants screening. You know, every once in awhile, you’ll have a great person who does go bad and it happens, but you know, tenant screening, you can really find, you can find the people that will stay and pay and they’ve got the ties to the community. My philosophy is if you can’t afford to keep it vacant, you can’t afford to keep it so you shouldn’t be trying to hold a rental if you can’t afford to keep the property vacant until you find the right person to stay there and that’s a great—you can tweet that one Brandon. You write it down.

Brandon: Oh, I will. I will. No, that’s awesome.

Josh: Got you, got you. No, that’s great, that’s great. Well, listen we’ve covered a ton of stuff and I’m looking at the list of notes that we write before the show and we’ve tackled probably 5% of the questions that we wanted to ask so.

Aaron: I guess we’ll just have to have a part 2 next week.

Josh: Well, yes, yes, exactly. Yes, it seems we keep doing this with people. We want to keep getting back to people and I think at some point soon, we will have to circle back, but before we start to wrap up, we’ve got a segment of the show that we’d like to call our.

Both Josh and Brandon: Fire round!

Brandon: That’s our monster truck voice.

Aaron: You got to do that like the monster truck, yes. Fire round!

Josh: Yes! There we go. That’s what I’m talking about. Yes, Fire Round is basically a, we take questions from the forums, questions that people have asked and we asked them for you in a format where you, the respondent needs to answer them hopefully in a concise way.

Brandon: Not like the time it’s taking Josh to explain the Fire Round.

Aaron: You know, it’s funny, I’ve listened to other podcasts and I heard some people respond and I’m like man, that was a great answer. You know, I’m wondering how they came up with that so quickly so I hope I can do as well.

Josh: Good luck. Alright, Brandon is going to kick this off for us.

Brandon: Number one, is whole—the questions is, is wholesaling illegal. This came from the forums so somebody said, “Is wholesaling illegal? My lawyer said it was.”

Aaron: Yes, get a new lawyer. It’s not illegal, you know, they wholesale food. Everything is wholesale so no. I think I respond to that one or maybe I read it. This is the worst question ever. I’m not even commenting. It doesn’t even justify a response. No, wholesaling is not illegal. Everything you buy is at some point wholesaled. You know, Walmart buys everything wholesale and sells it you retail. No, wholesaling is not illegal.

Brandon: Good answer.

Josh: Is there a part two to that question, Brandon, no I mean I don’t know, the basic, the premise was, are wholesalers acting as the unlicensed agents. That was kind of part two.

Aaron: No, I think an agent is, yes, that’s a good question, an unlicensed agent. They’re marketing the thing to be paid at commission. They’re representing an agent represents a seller and as a wholesaler, I’m not representing you. I’m agreeing to purchase your property and then contract law allows me to assign that contract. I took legal aspects of real estate when I was in—at just a local community college here and I recommend everybody do that. If you’re in real estate and you live near a community college, go take some of the classes. There’s some really great classes out there and legal aspects real estate was one of the ones that I really enjoyed, but no, you have the right to assign a contract unless it specifically says it is not assignable, you can assign it.

Brandon: Okay.

Josh: There you go, alright.

Brandon: Cool.

Josh: Here’s a negotiation question. Do you ask sellers on the phone what’s the lowest you’ll take?

Aaron: All the time.

Josh: Got it. Does that work?

Aaron: I don’t know if I would—yes, I wouldn’t phrase it that way. A lot of times I’ll say what’s least amount you’ll accept and not lose sleep at night or one that I like to do that’s really fun is if your house burned down and the insurance company sent a check what’s the smallest or what’s the least amount you would accept before for you called them up really upset.

Brandon: That’s good.

Josh: Nice.

Brandon: Alright, number three, should the new investor wanting to get into wholesaling, you know, you kind of answered this one earlier. Should a new investor get their real estate license? Maybe right away, first thing, should they get their real estate license?

Aaron: Well, I think you could be involved in the in this—an investor and work on that on the side and you know, I didn’t go out and get my license because I felt like I wanted to be licensed, I live near community college and I wanted to learn about real estate from the government side of it. I wanted to learn what the government, the state government required me to know as far as real estate and you’ll get that from the community college. Like, you can take escrow classes and real estate principals and they’re going to teach you all the laws and rules and things like that related to real estate from being an agent and being a broker. At one point, I realized, well, I have enough classes and enough credits, I can be an agent so I went and got my license.

Josh: Did you like that?

Aaron: I see the circle hand thing. I start talking fast so I’m going to get it all in.

Josh: Aaron’s very excited so we have to get him to wrap it up here. Alright Aaron, do you always at the start what you’re going to do with a property and do you ever change strategies to say from buy and hold to flip, wholesale so on and so forth after getting into it?

Aaron: I don’t always know, but I do always try to build in multiple exit strategies so I may have it as a rental, but have enough spread in there that I can wholesale it. There’s always a profit in a rehab and flip it so that’s always a great strategy, but my—every time the phone rings, I want to own it as a rental. If I don’t—if it doesn’t work for me as a rental like the one I have in escrow now, has a pool. I don’t want to own a rental with a pool because I don’t want the extra liability, and I don’t want to pay to clean the pool because I know the tenant won’t do it then I could wholesale it if I wanted to, but because it’s not profiting it, I’m going to rehab it and flip it.

Brandon: Nice.

Josh: Yes, got you.

Brandon: Best tip for marketing for a tenant?

Aaron: Marketing for a tenant, I would say use V Flyer. Yes, V flyer is the best way.

Brandon: Really?

Aaron: Yes, put it on V Flyer, it hits multiple websites. It’s going to hit Pat, Map, or Craigslist, Trulia, all these different websites. It’s a really nice looking flyer and put tons of pictures in there. One of my—the things that I do is when the house is vacant, we go out and we film a video tour of the house. We load that to Youtube.

Josh: Nice.

Aaron: We put a sign in front of the house with a 1-800 number so they can call and get all the information. I never take tenant calls so they can call the 1-800 and get all the information or it has our website while they’re in front of the house and they can see a video tour with what the house looks inside. I would create a website so you could put your own rental houses on there. That’s what we did.

Brandon: That’s cool.

Aaron: Again, it’s all about outsourcing it so we don’t have to do it.

Josh: Are you—who’s doing the video tours?

Aaron: Once we finish rehabbing the house, we’ll go out and do one video shot of the house and just edit it on MovieMaker. I think that’s standard on all Windows machines and so there’s no prices or anything like that in there. It doesn’t say. It’s just to tour the house. It uploaded to Youtube, it has the address, but it doesn’t have anything that would have to do with security deposit or price because those change.

Brandon: Yes.

Aaron: Any time the house is available, I can put a link to that on Youtube and people can click—I mean sorry on Craigslist. I can put that on my ad then they can click on that and then get a video tour on the house on Youtube.

Josh: That’s great.

Brandon: Cool.

Josh: Cool little tip. Alright, and how do you find a great realtor, now obviously, you’re a broker so, yes.

Aaron: Well, 99% of them out there make the rest of us look bad. That’s a tweetable. It’s hard to find a good agent.

Josh: Yes.

Aaron: Referral I really—it’s a people business, get out and start talking to people. The problem with that is you may get somebody who’s already entrenched in with an agent. You don’t want to go in and act like a wedge and try to start, you know, dipping into their source of honey so you know, get out and just start talking to people. It’s the really the best way, is to get out and talk to people. I have an agent now, he’s been sending me leads for years and years and years and I was writing a lot of offers and I just met him through that. He would actually respond to the offers that I wrote in. I thought wow, this is actually a good guy. He actually responds unlike a lot of agents.

Brandon: Yes.

Aaron: This guy calls me so he’s one to you know, put in the keeper pile.

Josh: Yes.

Brandon: Yes, that’s awesome. Cool. Alright, we are at the final segment of this podcast today. Something we like to call the

Both Josh and Brandon: The Famous Four.

Brandon: Todays.

Josh: That would be Famous Four.

Brandon: Yes, Famous Four, alright, we do this to every guest so you know the drill.

Aaron: You guys can’t do that like Acapella.

Josh: Famous Four.

Brandon: Ooh. You can do it Josh.

Josh and Aaron: [Inaudble][1:13:15].

Brandon: It’s actually really funny. You can hire on Fiverr, you can hire Barbershop Guys. We should.

Josh: Great. There you go.

Brandon: We’ll see if we can do that for next week. Alright, so first question, is what is your favorite real estate book?

Aaron: Without a doubt, hands down, I’ve made the most money from the concepts Think and Grow Rich. Without a doubt, I’ve read that book multiple times. Every time I read it I go back through and I use a different color highlighter.

Brandon: Nice.

Aaron: My book now looks like—it looks like a kid has gotten a hold of it. It’s multiple colors. I read it every year, but then I discovered, Millionaire Real Estate Investor and I think that book is the Think and Grow Rich for the real estate investors and I highly recommend everybody read that book. It’s an excellent book.

Brandon: Cool.

Josh: Nice. How about your favorite business book non-real estate?

Aaron: Favorite business book non-real estate, no, that’s a good question. You know, I just read the—oh, you know what, it’s—I have it right here. It’s Get All The Me—let me swing across the room and grab it.

Brandon: Alright.

Aaron: Alright, it’s Getting Everything You Can Out of All You’ve Got and it’s by a guy named Jay Abraham and he’s an old school marketing guy. It’s an absolutely—I used to give that book away free to everybody I knew. It’s an excellent book.

Brandon: Cool.

Josh: Nice.

Brandon: We will link to that book in the show notes at BiggerPockets.com/show37.

Josh: That’s correct.

Brandon: Cool.

Josh: That’s correct.

Brandon: Alright, how about hobbies, obviously, travel and fishing are on your list of hobbies. Anything else?

Aaron: I’m an amateur kick boxer. I do fight, my last fight was at a casino here in California. I didn’t win, but it went all three rounds and I didn’t get knocked down so.

Brandon: Nice, hey how tall are you?

Aaron: Five ten.

Brandon: You and I should fight at the next BiggerPockets conference because I don’t fight at all. I’m terrible, but I’m like six five so we can have fun.

Josh: He’ll crush you, Brandon.

Brandon: Yes, but wouldn’t it be fun? Admit it.

Josh: I would love to watch. I would put my money on Aaron and I would just sit and laugh and watch like I’m doing now.

Brandon: Alright. Next conference, we’re doing it. It’s on. Alright, any other hobbies? You want to. I mean.

Aaron: Fly fishing, kick boxing, traveling, yes, that’s it.

Josh: Cool.

Aaron: Those are you know—I try to—I’m easily pulled in many directions as a lot of people in real estate can be, you know. You hear about a new thing, you’re like, “Oh, you’re going to do that strategy?” I’m one of those people. I’m easily distracted. My friend has a saying, he’s like a—you know whenever I’m around it’s like squirrel so. He does that screams squirrel. We’ll be talking about something and I’ll just change the subject and he’ll be like squirrel. You know so I’m easily distracted by the squirrel so I try to focus myself on it for exercise, I kick box. My hobby is fly fishing. My income is real estate and try not to do anything else.

Brandon: Nice.

Josh: Nice.

Brandon: Alright, final question of the day, what do you believe sets apart the successful investors from those who try, but then they give and fail?

Aaron: Two words, I have written on the top of my yellow pad on my clipboard that I carry with me all the time and it’s consistent and persistent—well three words, consistent, persistent, action. You just got to keep doing it. You can’t give up and you got to do it over and over and over again. It’s like an airplane. An airplane when it leaves—say it’s an airplane flying from LA to New York. It doesn’t fly in a straight line.

It’s constantly adjusting course. It blows off a little bit in direction, you know, and it’s constantly adjusting and ultimately, they land in New York. Real estate investing is the same way. You’re going to constantly be blown off course and you just have to keep doing corrections see what you’re doing wrong, tweak stuff, look at other investors what they’re doing. How they’re being successful, surround yourself with people that you want to become. You will get there, they will bring you up, they’ll help you out. Get involved with the mastermind. It doesn’t have to be a paid mastermind. Get a couple of people together and as seen on BiggerPockets, people talked about doing a guru group, a Google Hangout, that’s a great idea, but get involved in some kind of a little mastermind.

Brandon: Yes.

Aaron: Where you can talk about stuff and talk about your problems and your successes and drag yourself up and people will help out and you can help other people. That’s why I’m involved in BiggerPockets, you know, I went and spoke at the conference. I didn’t get paid, nobody got paid for any that, well I hope nobody got paid because I didn’t get paid. You know, it was a great conference. I really can’t wait for the next in Vegas because that’s what I’m being told at the Golden Nugget. Josh do you want to just throw down the dates right now.

Josh: You know what, since you’ve pre-empted me at announcing, listen ladies and gentlemen, the next conference is not up. There’s no plan yet, but clearly we’ll listen to Aaron’s vote at the Golden Nugget.

Aaron: It’s off the strip, it’s affordable, it’s a great time, the Golden Nugget, Las Vegas so look for that in the future podcast. Josh is going to make that announcement.

Josh: Clearly Aaron is not getting paid for any of this from the Golden Nugget to.

Brandon: You may not even be invited back next time.

Aaron: I might not be in attendance. I might be barred. You know, but Josh that was—to be involved in BiggerPockets has been wonderful. I really enjoy it. I get a lot out of it. I like to contribute, but when you get to meet the people face to face, that’s the connection and that really helps out a lot because you put actual human being behind that. You can talk to them in person, you sit in the bar and talk about the deals. I think we stayed awake, you know, one or two in the morning that night in the hotel. Just talking about deals and you get a lot more content and a lot more information when you’re in a small group like that.

Brandon: Yes.

Aaron: Just get involved in some kind of a little mash. Create your own, we need every Tuesday at a Sizzler, you know, that way, we used to do it at another restaurant, but you know, us real estate investors are notoriously cheap so it would get the bill, the bill would get passed down and the dude would end up spending $75 for a hamburger so because everybody else short changed it. Now we needed a Sizzler, everybody pays for their own food and they’ve got a little private meeting room and so find a Sizzler in your area and just start marketing, you real estate mentoring meeting, your mastermind, every Friday at noon.

Josh: Nice.

Brandon: That’s cool.

Josh: Nice and you know, that’s happening on a large scale now on BiggerPockets. It’s pretty cool to see. I mean we’ve got meet ups and dozens of cities now around the country and it’s all kind of organically happening through the site, through people setting up key word alerts on the site and you know, somebody just kind of taking the lead and saying, “Hey I want to—you know, I’m in Des Moines, I want to do this. Everybody else in Des Moines, jump on.” It happens and it’s fabulous.

Aaron: Alright, well I’m going to throw it out there right now. The house that have in escrow, we’re waiting on the seller to send the contract or not the contract, the grant deed. She mailed everything back, but the grant deed. I don’t know why, but escrow called her. She said she’s going to mail it back, when she sends it back, we get the house all rehabbed, I’ll do a meet up at that house when it’s ready for sale.

Josh: Nice.

Brandon: Nice.

Josh: There you go.

Brandon: That’s awesome.

Aaron: Bring your swimming suit because the pool will be rehabbed, you can go swimming.

Josh: Nice.

Brandon: Nice.

Josh: Nice, nice, alright, well listen, you guys pay attention, focus, and follow Aaron on BiggerPockets and of course, you know, when he announces the pool meet up/pool party, you know jump in and make moves, but otherwise, listen, it’s been a pleasure having you on the show. I know that got a ton of great advice here and we really appreciate having you and look forward to seeing you around the site.

Aaron: Yes, and I appreciate what you guys do. I mean this is, BiggerPockets it’s an amazing website to go to. You can spend a lot of time on—and it’s spending. You’re spending your time, you’re investing your time, and it’s—you’re going to get way more out of that site than probably—you know any other site you go and visit on the web on the internet. I mean, BiggerPockets has been phenomenal, I really enjoy it and I really would like to be with the people that I meet there. I like sharing and helping people out.

Brandon: That’s awesome.

Aaron: You know, go forth and make money.

Josh: Nice.

Brandon: Nice.

Josh: By the way, he is not getting paid for saying that. You know, I’m not going to pay him for anything.

Aaron: That’s okay man.

Josh: No, I’m just kidding.

Brandon: Well, thank you.

Aaron: You know, a lot of people helped me to get to where I am and it’s just part of paying it forward or paying it back or whatever you want to call it.

Josh: Yes.

Aaron: You got to help out the people that are getting into the business because you never know, they might be your next partner.

Brandon: Yes.

Aaron: They might bring you the next fat deal. You never know so I like to try and help people out.

Josh: That’s what we try and do and we appreciate you being a part of it, we really do. Thanks again Aaron.

Aaron: If you want to go on vacation, to an exotic location, just flip me a house. Yes.

Brandon: Alright, well thank you Aaron.

Aaron: Hey, you guys have a great day.

Josh: Alright guys that was our show with Aaron Mazzrillo. We want to thank Aaron again for taking the time. He certainly did take a lot of our time. It’s funny I can say that when he’s not here to defend himself.

Brandon: Yes. We can knock him afterwards.

Josh: Yes. No, it was great, Aaron was awesome. Lots of really, really good advice so big, big thanks and again, do make sure to jump in on the show notes at BiggerPockets.com/show37 so you can connect with him or just give me a hard time as some people have begun. Somebody called me out for like falling asleep or something during one of the shows and you know I take umbrage with that, you know, we’re on camera. We’re working this thing. You know, granted some time my mind wanders off thinking about real estate.

Brandon: Like to day, me thinking, I got to call my title company and talk to that guy.

Josh: Aaron totally busted you on that. That was awesome.

Brandon: That was awesome.

Josh: It was, it was, but anyway, thank you guys for listening. We really, really do appreciate it. For those of you continue to leave us feedback we take heed to all that we try to make this show as good as possible for as many people as possible. Really quickly, if you are a listener, we have now 13,00 average listeners per show, we’ve got about 400 something reviews on iTunes.

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