Top 10 Takeaways - Podcast 426 with Jon Wooten

BiggerPockets Podcast 426: Using the “Sunflower Method” To Buy 18 Properties in Just a Few Years with hosts Brandon Turner & David Green and guest Jon Wooten.

1. How to find a mentor AND get your first rental

My wife was babysitting for somebody who had a few rental properties. And I had met him before. I just kind of asked him about it. I said, "Are you still into rentals?" He said, "Yeah, you still looking for some?” I said, “absolutely.” And he said he had 10 units: a four-unit and a six-unit right beside each other. And if I wanted to, we could work out a deal where we will owner finance. It wouldn’t cost me that much out of my pocket. And that way we would let me get started. And 10 units to start scared me pretty bad. So he said, “Go drive by and see what you think.” I went and I drove by them and they were rough. There was nothing too pretty about them when I got there. He showed me an eviction, what it looks like. We walked into one house and you could tell someone was mad. They had holes all up in the wall. There was furniture thrown everywhere. And he said, “This is what it is. Sometimes if someone gets evicted, they get mad. Sometimes they’ll just leave it. And sometimes they’ll clean it up and be cool about it.” And I told him that I’m in. So I ran my numbers and after everything, I was going to be making $800 a month. It was really nice because anytime I had a problem, I could call him. Because he did not want his properties to go under or fall apart either if I foreclosed and stopped paying him. So I’d say, “Hey, I’ve got somebody who won’t open their door. They moved out.” And I’m like, he doesn't have a key. We’ll go kick it in. Okay. So I’ll go and kick it in. I figured that out. And then, “Hey, I’ve got an eviction to do. What do I need to do?” He said, “Meet me at court on Wednesday at nine.” I was like, okay. So everything felt like trial by fire. He was a really good mentor to have through this whole transition process. Some people listening to this might ask why would somebody do that to you? Why would they work with you on that? That sounds like a lot of work for them. It’s because they don’t want the property back. They don’t want to just sell it to you and then sell or finance it. They want monthly passive income forever. So it's in their best interest to train you over time to be good at this so that they don't ever get the property back. And it's low risk for them. They don't have to go through foreclosure if it doesn’t work out the first few months, because you just pan the keys back to them and be like, well, it didn't work.

2. Why you should make it an effort to get to know your local real estate investors

I would go to the MLS and I would try to find deals. I would go walk around the houses, even though I knew I couldn't even buy them at that point, just to kind of dip my feet in. I tell my friends this because I have friends in Charlotte, North Carolina right now and they ask me like, “What about this? What about this?” And all I keep telling them is, “Go make phone calls. Just tell them you want to pick their brain. Tell them you want to ask them how you can get started. This, that, and the third. And at the end of your conversation, just ask them, “Do you have any problem properties that you want to get rid of, any headaches?” And you might not find anybody, but I’d say probably three out of 10 times, you’re going to find somebody who wants to sell something. And then they know the game. They know how much it’s worth. They know that you need to make your money on it. So they’re not ridiculous with it.

3. Why self-managing is a great way to gain experience

Managing your properties can be terrifying. Just absolutely terrifying. Back then if I had a tenant call me nine, 10 p.m. and say, “Hey, my toilet isn't working. This, that, and the third.” Well, they just moved in two weeks ago, and toilets are doing this. They’re going to bail on me. I’m going to lose $500 this whole month. You kind of think yourself into a storm. And the thing that I learned is that if there is a problem, there’s a solution, and it’s never as bad as you think it is. I have had water line breaks. I’ve had heaters go out. I’ve had broken windows, doors, cops. I’ve had somebody die at my properties once. I didn’t know that person, but it’s always something that gets handled and it’s never quite as crazy as when your mind makes it.

4. How to get seller financing on a rental

For the very first apartment I bought, I did seller financing and I didn't have the money for it. So they let me do a lease option, like a master lease option which is where I rented it from them and paid them the rent that they wanted. I managed the apartments for a year and a half. I would give the prior owner a check at the beginning of every month for how much he required, which he needed seven percent on a 30-year is what we agreed to. And once we decided those numbers, I would just go and write him a check for that. I would go and pay the utilities. I paid their utilities and the rest was my profit. The first five months. That was what he wanted for me. He wanted to see that I had skin in the game. So I just gave him all of my profit for the first five months.

5. Why you should call “for rent” signs

I met this other guy whose phone number I saw on a rental property outside of a house. And I said, “Okay, we’re going to talk to him and start putting another one in the pipeline as it were.” And I ended up buying a house from him for 65,000 before I closed on the 10 unit. Anytime I saw a phone number, I would call it. If people did nothing but that, just that one thing and made that their whole thing for the year, you will buy a property that way. Every, pretty much every landlord that I've ever known has properties that if they were asked and pushed on it, they'd be like, yeah, I'd probably sell that one. I don't really like that one. Or I've already maximized my return on that one.

6. What the “Sunflower Method” is and how it builds wealth

In the game Plants vs Zombie, the point is to amass as many sunflowers as you can so that you can start generating because the sun points give you more weaponry plants. The same logic applies in real estate: the more units you acquire, the more profits you are likely to generate. But of course, you have to begin with a few units, you don’t want to learn how to manage thirty or more units all at once. My whole thing is, I’m just going to play life like a video game. And if I can keep saving up my sunflowers (small Single Family Homes), I can go on to eventually buy the 11 unit (apartment complex) that’s going to make me 3000 or whatever dollars a month. But I couldn’t do that in the beginning because it sucks. You have to just take it slow in the beginning. But then you realize that the time that went into it is not that bad. Do you really want to learn how to solve 30 units worth of problems in a year? I don’t think you do. Because it’s a lot. That’s an example I often give where, when you do well buying the first couple of properties that grows and then those buy you the next wave or the next round. And then now you’ve got more cash flow coming in from that one that was bought for with the equity from the first ones. So now that you can save faster to get the third, which is why real estate investing goes really well when you take time, for sure.

7. The best way to find a quality (and inexpensive) handyman

There are some problems that I don’t want to tackle because they start to get too complex or they require a different level of skill. So that’s where you want to have a good handyman who you have developed a relationship with. Maybe you have talked to a few different people. You have looked online, you’ve tested a few out. Facebook is great. Asking around is great. Honestly, going into Lowe’s, I find people all the time. This happened with my outlets. I was going to pick up about 15 outlets the other day for one of the units. I wanted to replace all of this unit. And I saw one guy, he had some electrical boots on and he was sitting there looking at some of the outlets and I said, “Hey, are you an electrician?” He said, “Yeah, I am.” And I started talking to him, I got his phone number. And I talked to him and we made a deal. He went out and replaced all the outlets for me for $100 for the entire unit. So just always asking around, always trying to find that relationship.

8. Fake cash flow vs Pure cash flow

This is my problem with a lot of turnkey companies. There are some good turnkey companies (for those who don’t know, turnkey companies are the ones that will sell you a completely fixed up property with a tenant in place). They'll manage it for you. And they claim you're going to make all this money from owning this rental. And sometimes they’re right. But a lot of the companies I’ve looked at their numbers. They’re like, oh yeah, we already fixed the property. You won’t have any repairs. And I’m like, yes, you will. You are always fixing things. So a couple of points on this. One, I got a new book coming out next year. It's on multifamily. I wrote it with Brian Murray and we talk about a lot in this book. There is something called fake cashflow. And then there's pure cashflow, just like there's gold and then pure gold. Purified gold has gone through the fire. It's gone through a tremendous amount of fire to release all the impurities. The same thing is true with pure cashflow, this is your actual cash. Not your lying cashflow, not your fake cashflow, not your optimistic cashflow of what we all think. This has gone through the fire. So my encouragement to people is when they’re running their numbers, don’t do what some turnkey providers do. And just be like, “Oh yeah, you’ll never have repairs. You won’t have to fix things ever.” I assume, and again, this completely depends on the age of the property, the condition of the property, the area you live in. But I typically assume between five and 10% of whatever money I collect is going to go out in repairs, and another five or 10%, I’m going to set aside for future replacements, which is what we call a CapEx. So if it’s an older house, I might set aside a total of 20% every month just for those two things, repairs and CapEx. And if it’s a newer house, I might go more like 10% total, but don’t kid yourself or anybody and think that you’re going to get away with not having to do repairs ever.

9. How to properly inspect a house before you make an offer

I had taken a few of those home inspector classes and I wanted to start my own business doing home inspection for a little bit, or at least do it on the side. So I had a rough idea. I was going through the house. Okay. Looking for the stepping cracks. Don't see any of those, looking at the window seals, looking for water intrusion. Well, my dumb, dumb self didn’t go up on top of the roof. I looked at the roof visually from the road. I was like, “Okay, it looks square.” So a couple of months later, a tenant texts me and they’re like, “Hey, my roof’s leaking.” So I send my guy out there and he climbs up on the roof and he shows me, first thing they do is they pull up what’s on top of the roof to the porch, just rot, just rot. And I was like, “Oh my God.” And we ended up spending $10,000 on the roof for that house. So even though that house is a good deal, 750 a month, I think the mortgage is 350 ish a month and then taxes and insurance brings that up another 100. So that house makes three-ish hundred a month. And that’s now depending on which purification level we’re looking at, but it’s still made money. So I’ll take it. But then writing a $10,000 check was no fun either. So now that house, any time that they give me rent, just go back to paying that. If you think that you know how to inspect the house, make sure that you really go through and inspect it. You don’t have to worry as much as you might think you have to, but still, go up on the roof. Look at the big expenses. If you see double-layered shingles, or if you go up and you see water up in the ceiling, definitely check that out. That’s worth an ask from the buyer. And don't be afraid to ask the buyer. A lot of people will get too aggressive. Let's say they found that house for 60,000. They say, "Let me get it for 50." You might start off a little too strong. But then on the other side of things, you don't want to scare away your seller, but you also don't want to buy a bad deal. So always, always, always do your , make sure that the house isn't falling apart, make sure the roof's good. Always go back to your fundamentals, make sure the house makes money.

10. What the “Car Accident Method” is and why it is valuable

So I was at Starbucks. I was hanging out with one of my buddies and I watched a Mercedes back into another car, a really nice car backed into this Honda Civic. And they grounded the entire side of it as they backed in. And I saw the guy who got out and I have heard of him. And after you call so many people looking for phone numbers of people in real estate, you start to get familiar with names. And I’ve seen this face before and I’ve met his uncle. But he’d never met me. So when he came back out, we saw his car, he asked whose car he hit. And I told him it was one of the workers inside and he came back out and I was like, “Are you David?” And he goes, yeah. And I said, literally just out of nowhere, “Do you have any properties you’d be willing to sell? I’ve heard your family’s names. This, that, and the third, I know it’s weird coming out of left base.” He said, yeah. He said, “Take down my phone number. There’s a property. I’ve got a few of them.” So he texted me and we found this one we’re talking about. And I bought it for 60. But that’s how I found him. I watched him back into somebody’s car at Starbucks. And then, “Hey, sorry, you did that. Do you have any houses?”