You're listening to Teip on today's episode, Stig and I speak to Brandon Turner and David Greene from Bigger Pockets. Bigger Pockets is the world's largest real estate community. And Brandon and David guide their audiences through the complexities of real estate investing, as you'll see there, a wealth of information. And on today's episode, you'll get advice on how to diversify into real estate if you're a stock investor. We'll also talk about how to value properties and even go into practical advice on finding time and money to get started with your real estate investing.

So without further delay, let's go ahead and get to it.

You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investor's podcast, I'm your host that brought us in, as always, I'm accompanied by my co-host, Preston Peche. We have the privilege of inviting not just one, but two brilliant guests here today, Brandon and David. Guys, thank you so much for making time to come here on our show.

My pleasure. Stig there. Thank you for having us. So, guys, one of the things that I think we could do better here on our show and that you guys do a great job of is that we always assume that our listeners have money to invest.

We never pause and ask, so what if the listener does not have any money in the first place? And of course, one approach is leverage, but we always discourage all listeners from taking on any debt if possible. However, this story is a little different when it comes to real estate. It would be crazy not to use at least modest leverage. And Brendan, you started with just one thousand dollars to your name. Could you please talk to us about your very first deal?

I started with a house that I lived in and then I rent out the bedroom, so this was back in two thousand seven to six thousand seven and they would give a mortgage to anybody who had a pulse. You can get a loan. And so I went and called up a lender and I was like, I don't have any credit.

I don't have any money. I barely make any money. I work at a minimum wage job. Basically, I got nothing. And they're like, great, you're approved for as much as you want to buy. And so that that's how the world was back then, which is also why we crashed in 2010, seven and eight and nine. But I bought a house that was actually fairly cheap. I just bought it super cheap, got a mortgage that covered almost the entire thing.

So I didn't have to put really hard any money down.

And then I rented out all the bedrooms and I have to live for free.

So I was my very kind of first foray into real estate was what we call house hacking, which is where you buy a house and rent out the bedrooms, or you buy a multifamily like a duplex or triplex and you rent out two or three units, maybe four units, and you rent out the other units.

So I've actually done both those things today. But yeah, my first one single family house with a big, fat old mortgage. But it was a cheap house I fixed up and made some good money on. And so, Brian, I can't help but ask why real estate or other investments was that because you just really wanted to do it? Was it the only option you had? Why real estate? When you got a thousand dollars, I mean, you know the question, what's the stock market, let's say the S&P 500, what's that average per year, like eight, 10 percent maybe.

Let's go crazy, right? Like, let's go 30 percent the last couple of years. Right. Last year, I think it's been crazy out of nowhere, Robert. And I don't pay attention, but I'll explain why that in a second. Let's say I got a whopping 30 percent on my money. Well, a thousand dollars. That 30 percent is three hundred dollars a year. So, wow. I would be bringing in like that. I don't know.

Not much. Twenty five dollars a month. It's not much. Right. So in other words, like when you have no money, it's really hard and you make no money because you have not a good job. It's really hard to get into any other kind of investment other than starting a business or investing in real estate. It's really hard to make good money. It just takes so long to do so.

And so for me, it was kind of out of necessity. But more importantly, in the beginning, I read a hundred books on real estate investing. Every I have read every book in my library catalog that I could order. And on real estate investing, I didn't have money to buy a book. I get them all from the library and I read a few at the beginning on the stock market. And you know what? I couldn't get into them.

Like, I read like three pages and I was bored to death. And now I'm not saying there's anything wrong with stocks. It's just everybody in there, like soul has things that appeals to them. We call that in on our podcast. We say like follow the fire, like there's a fire inside you that, oh, I love this thing. And real estate fired me up. I can read one hundred books on real estate. I can read your books today in real estate.

I still love it. I still do read books on real estate. I can't read books on S&P. Five hundred. I can't read books on a lot of that stuff on day trading on any any of that. I just, I don't have the fire. So that's why real estate works for me, because I had the fire to do it. I absolutely love that I'm sure you're much more interesting person to have at a cocktail party than me, you know, whenever I start saying I'm so I have the fire in me to talk about financial statements.

People like me want to speak to the next guy. Those are the guys that are the richest in the world, those are the billionaires, the ones I can study a financial statement, I think I look at them. I'm like, I don't even know what that word means. It's got more than three syllables in it. I don't I don't even try. David, I want to hear your background, absolutely love that actually go into this meeting and I'm putting you on the spot here.

I was speaking to one of your producers. And just like, you know what? If you want a fascinating story, if you want the best story, just ask David, what is your background, then that will happen. So I know I've really just build up the expectations here, but you have a very interesting background. I would just put that mildly. So how did you get started? Well, I don't know that I can top your story that you told on our podcast, where a bigger pockets member saved your life at a hospital, came and paid your bill just because you were bigger pockets friends, that was really cool.

So I'll do my best. My story is actually much less intentional than Branden's. When he tells his story. You hear he had a plan. He wanted to make it happen. He read books, he formulated something. He did a B testing to figure out what worked and he built his way to success. I fell backwards on my butt into real estate, had no idea that I was going to be here. And from there I thought, oh, this is pretty cool and really built everything out of that.

So I was a police officer and I've always been a good saver of money. I knew that I wanted to build wealth or be rich. I had no idea what that look like. I assumed you just save a bunch of money and then eventually things come your way and you buy them. I didn't have a plan to be an investor. I was really all in on law enforcement. That was my career. I just wanted to be the best police officer I could be.

And the economy went terrible. So I was saving just to buy a house. And prices just kept climbing and climbing and climbing. And then I got discouraged. I'll never buy one. So rather than doing what everyone else did and just spending way too much on a house, you could never afford to get a loan that was going to reset in two years.

I just said, well, then I'll just save up money and I'll build a house myself. I'm not going to jump into this market.

That was clearly insane. This wasn't like now where you're like, oh, is the market going to crash? You had teachers buying million dollar houses at that time. I got really lucky and I had a stable income when the economy tanked. So 2010 hit twenty nine. Every single property's for sale. Where I live, every three homes has a for sale sign. All we hear on the news is don't buy real estate. It's an anchor. The economy's going into a depression.

We're never going to get out of this. And I had a buddy who had a property that he was going to buy that he couldn't buy because he was moving away to go to Bible College. And I really just as simple as it was said, you know what? It sucks that he's going to lose his money. I'm going to need a house at some point. I'm probably going to have a family. I'll just buy this one, but a tenant in it.

And then later on, I'll move in.

That was as far as my thinking went. I had no idea that there were even resources to study when it came to real estate investing. I didn't know anyone that did it. I bought that house. I vacuumed it. I remember my mom and my friend went with me to wipe down the counters like I didn't know what I was doing. That's what we did. And then I put an ad on on Craigslist, a website we have out here where people go to, like, buy and sell things like a glorified garage sale website.

And I found a tenant. I didn't check their credit. I didn't check their rental history. I didn't call their employer. I just thought, well, this person seems pretty nice. I'll be nice to them and they'll be nice to me and it'll go fine. And it did not go fine. They were much better at being a professional tenant that I was it being a professional landlord. They paid me for two months and then completely stopped paying, kept saying, oh yeah, I left the money at your mom's house under the mat.

It wasn't there. Oh, the checks in the mail. Don't worry, it never came. That dragged on for several months. I finally got them evicted and then I found out the bank had sent them a check, not the bank, the escrow company from when the deal closed for the extra taxes that I paid during escrow that when the property was reassessed. Because you have to remember at that time, prices were going down. So when you buy at your property, taxes are based on what the house was worth the last time it sold.

Usually they go, they go up. Usually you get a demand. Say you gotta pay more property taxes on the house you just closed on. Well, in this case, there was an excess and the escrow company sent the check to the house, not to me. So my tenant cash the check paid me with my own money for two to three months and then just stop paying. That was my foray into real estate investing. It was terrible. I was busy working.

I had this new career. I couldn't go. I was buying Landlords for Dummies books and trying to figure out what am I supposed to do. It was terrible. I tried it a second time because now you've got this house you're stuck with for thirty years. I couldn't sell it. Thank God I couldn't sell it. I found the next couple that came to look at the house said, Oh yeah, we were working with the property manager. He sent us over here to take a look and I was like, what's a property manager?

And they said, Oh, he's this person that that helps collect the check from the landlord and find the tenants. And he helps us find houses. And I'm like, oh, I got it. I should talk to one of them. And I literally just called the property manager that they had and said, Do you want to manage my property? And he was not good at it. This was it was a former drug addict. I found out later that was in and out of rehab the whole time.

This is the person managing my funds. It was a rocky experience, but even with a terrible property manager, it was so much better than when I did it myself. And a little light bulb went off and I realized I just need a better property manager and I can just work and save money and buy these houses and someone else will do all that stuff that I'm terrible at. And that was how I became a real estate investor. That is an absolutely amazing story.

So, guys, the reason why we study billionaires here on the show is not only to study their success, but also their failures to achieve financial success. Also, we found it a lot more profitable to learn from other people's mistakes than to make the mistakes ourselves. So could you talk to us about your most expensive mistake and how our listeners can avoid them? Well, after that initial experience, I got burned really bad, so I became a much more conservative investor, probably more so.

In fact, if we're being honest, one of my maybe my biggest mistake was being too conservative. We're talking about 2010, 2011, 2012. I've got a job in law enforcement that's incredibly stable. I can work unlimited overtime. I have zero bills. I have no family. I don't have any risk, no obligations. I'm living with my parents still and I'm saving.

And I wasn't buying more houses because all I could think about would be what if every tenant leaves at the same time they're all vacant and it's six months to find a tenant and all the overtime dries up and a comet destroys my mom and dad's house and I have to buy a new one. It was just nonstop worst case scenarios going through my head and I built my plan on I have to be able to survive under those conditions. I never asked myself, is that reasonable?

Is there a problem finding tenants? I mean, looking back, tenants were beginning to find a place to live in because they all had their houses foreclosed and they didn't have anywhere to go. So I went too far. On the other side. I became ultra conservative and I looked at everything as what could hurt me. And I lost millions of dollars in money that I would have made if I had just bought a couple of houses a year instead of one house a year.

So that was one big mistake. Another mistake that I found over the course of my career was that I didn't. And this is it's funny. We started off talking about leverage. I should have used the leverage earlier. So I was part of why Bigger Pocket said that you should hear. My story was that I would work one hundred hours a week as a police officer. I would go to work. I'd work an 18 hour shift. My house is about an hour away from work, maybe further.

So I didn't want to drive all the way home, sleep and come back. So I just sleep in my car for two hours, maybe three hours, get up, work another twenty hours. And I did that for several years in a row. I'd slept in my car two to three nights a week and if I could sleep in my bed, that was like a day off is how I looked at it. And I just saved all this money.

Then I put it all into real estate. The problem is you get taxed horribly. When you do that, you're just kind of running on this treadmill thinking you're going somewhere and you're not going nearly as far as you think, and then you dump your money into real estate. Well, I was buying two houses a year, maybe three and a good year.

And it was so much work. And you're paying such a price. It's so hard in your health. And I thought I was getting really far, but I wasn't. And what happened was I switched my strategy from put twenty five percent down on every house, be extra conservative, don't borrow the extra money on that three and a half percent interest rate or four percent interest rate you could get with real estate. And I started buying properties for cash, fixing them up and then refinancing them after they were fixed up and pulling my capital back out.

So then I could use the same capital over and over to continue buying real estate, buy them pretty significantly below market value, improve them through the rehab process. So I'm creating a lot of equity. It's not risky. I'm still leaving. Twenty five percent of the equity in the deal. I'm just removing one hundred percent of my investment basis back out of it. And then I went from buying two houses a year to two houses a month. And that's really when I became what I call like a black belt investor.

I got so many repetitions. I did it so many times that I got really good at identifying what properties work, what people I need on my team, the fear that went away. It just became this monotonous, kind of boring process of let's look at the numbers, let's look at the spreadsheet, let's look at the area. They all look good by the property. OK, so I heard your story about Brandon, the David say, I'm convinced we just started the interview, but I'm convinced at least I should test out real estate investing, see if I have that fire in me to get started with that and say that I commit to set aside at least a thousand dollars and then don't have as much money, say I have a thousand dollars to make an honest effort to get started.

What is my first step? I would say, first of all, there are a million ways to invest in real estate, OK, maybe not a million, but like hundreds of ways to invest in real estate, you could be in an area where vacation rentals would be awesome.

Like if you're in a city where people travel a lot now, you could do vacation rentals like Airbnb or Vario. If you own a house right now and you just want to turn it into a rental property and you move to another house. That's another great. By the way, I would say most people get involved in real estate as they turn their own house into a rental. So there's that net cost. No money, really. I mean, you just move out and rent your ass out.

So there's that option. You could put money into somebody else's deal.

If you're like for example, if you have a net worth, you can put money into somebody else's deal. If you have the desire, if you have enough for a down payment in America, that's typically 20 to 30 percent down. I'm not sure what else in other countries, but 20 to 30 percent down. So if you've got enough money for a down payment, you could go that route. Or one of my favorite ways when you have no money is to find somebody to work with.

I mean, like you find a partner and say, hey, why don't you put in the money and I'll put in the time. If you if you had no money, that means you better have some time and effort and hustle and and everything else you've got to bring to the table. And so go find a partner who's got the money. But they don't have any hustle. They don't have any time. They work a full time job, they're busy, but they can put down 20, 30, 40, 50 thousand dollars for a down payment.

And so you basically the partner brings the money, you bring the hustle, the knowledge, the deal like a good investment, and then you just work together. That's how I built up my portfolio. A lot of it was. And I said to you today, I mean, today I buy big deals, but we still use partners who bring the money and then we bring the deal and the expertise and the knowledge and we do deals together. So you can do that on a single family house.

You can do it on a two hundred unit apartment or mobile home park. You can do it anywhere in between there. So there's just a few avenues for getting started. Let's take a quick break and hear from his sponsor.

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All right, back to the show. So, guys, we have listeners with just different backgrounds in their personal net worth. We have many listeners who manage more than a million and even a significant share with even more than 10 million in the stock market. They might not have too much time to conduct real estate research, but they would like to allocate a part of their portfolio away from the stock market. So what would be your recommendation for people like that?

I would say so the benefit of investing in stocks, at least from my opinion, because we get this all stocks first real estate conversation all the time, real estate is going to be more labor intensive. It's going to be a slower way to build wealth. It's more like planting a tree and you wait and maybe five or 10 years later, that tree starts to produce fruit, 15, 20 years later, is producing a lot of fruit. And 20, 30 years later, you could literally cut that tree down and plant a bunch more trees with the equity that you've built, stocks is a much quicker if you invest correctly, you can build wealth faster and there's less labor that you can do yourself to affect the outcome with real estate.

There's a lot you can do specifically to add value to your investment stocks. You're not in control. So what I find is people that appreciate stock investing, they don't want to do a lot of work. Maybe they're the works on the research that they do for the company, but they like pushing a button, buying the stock. They're done. Then they see how it goes. Real estate investors tend to be someone that wants to be a little more hands on.

So the first part of this question that you ask, how do you invest?

If you're used to doing stocks, you want to diversify into real estate, you probably don't want something that's hands on, because if you enjoy stocks, what you enjoy is picking the horse you think is going to win that race and betting on it and doing your research. That's the work you do. It's not managing a contractor and and researching rents and looking through contracts to find out how you can adjust your lease. People are going to like that. So if you're into stocks, what I would recommend is you go find a general partner and invest in either their fund or their syndication because the process will feel very similar to picking a stock.

You're going to go choose the partner, which is like choosing a company. You're going to look at their track record. You're going to look at their investment plan. What type of properties are they going to buy? What is the income based on? And then you're going to bet on that person and put your deal, your money into that that person's plan. It's very similar to stock investing and it's also hands off. You do nothing once you've invested the money they're doing all the way.

I like to call that strategy the earn, learn and turn strategy. You earn your money doing what you do best.

Like most people think they got a jump in a real estate and then go like flip houses or whatever, like, you know, buy them, fix them up and sell them like you see on TV. It's a great way to make money. But most people who have money, like, for example, you're a banker, you're a lawyer, you're a doctor, you're an athlete, you're a whatever a finance person.

You make really probably good money at your job. Your best thing, I think, is to earn money doing what you already do really well. And then you learn about the type of investing you want to get into. So, like, if you want to, well, I'll come back to that one and then you turn your money over to somebody else. And so the learn thing is important, though. You can't just give your money to anybody.

So you got to learn about the type of investing. You feel like you've got some fire after you and then you got to learn about the investor that you're going to invest with. You just don't want to throw money at some random thing because it is it is riskier than, for example, throwing your money with Apple. I mean, we can all kind of trust that Apple is not going to suddenly run off to Mexico with your money because there's a lot of people and there's a board of directors and they have a lot of laws and rules that govern what they do.

But if you give your money to me and my fund, like you have to trust me that I'm not going to run off to Mexico.

Now, there are safeguards in place, like there are things that legally I'm not going to run off to Mexico, but you've got to trust. You've got to build that trust first. You got to understand that it's a lot smaller organization. There could be a higher increased chance of shady operators and just bad people out there. So anyway, you earn your money, you learn about the investment and the investor, and then you turn your money over to somebody else.

I think that's a good strategy for people who don't want to be actively involved in real estate but still want to play in the game. It's interesting you would say that let's say that I'm even lazier than that, I don't even want to go out and find a pot, perhaps like I'm not the lazy. One of the main objections we hear from the audience here when we talk about stock investing is that they don't feel they have enough time to do any type of analysis.

They make a good income. Like you mentioned before, Brenda might be a lawyer or doctor or whatnot, but to them, it's just it's hard to like figure out what you're investing might be interesting, but they just don't want to lose money. I guess that that's the first thing that we hear. But by the way, we should also grow that money we set aside. And also, we don't want to spend too much time on the right.

So so it's a tall order. And so for those guys, we typically say, well, buy a low cost ETF, a stock ETF by Vanguard, it might grow eight percent a year or whatever that might be. It's not going to be super, super exciting. But, you know, you own a small part of every single business on the planet. It's probably not going to go to zero. At least I'm sure you hear about the lack of time to when it comes to real estate investing.

So what if our listeners want to be exposed to real estate, but they just have so little time to conduct research regardless of the net worth? How do they enter? What do they do if they want to diversify? There are other things that are even more hands off. There are crowdfunding portals you literally like in your phone, can invest in a company the same way of buying a stock. It's very, very easy and passive at that point.

You really are nothing more than just a glorified lender to these other real estate investors. Nothing wrong with that. But you're not necessarily going to always achieve a lot of the upside that the owners of the deal are going to get. Same with US syndication. You get a little bit more in a syndicate. When I say syndication, I'm talking about a bunch of people pooling their money together and then giving it to an operator like myself or David, and then they go out and invest in the deal.

So there's like the syndication side and then there's these crowdfunding portals, which you can give money to. There's also like this idea that if you don't have time, first of all, real estate's fun, I think, because it doesn't take much time in reality.

Like if you have an extra 30 minutes a week, you could probably buy a real estate like it doesn't take a tremendous amount of time to get started, to make an offer to go online, to look at a deal, to analyze one. I mean, it's all five minute tasks. Take some learning. You might have to read a book or two. But if you have the fire, you're going to figure it out. You're going to make the time.

And if not, then there is like I like David said, you could put your money into another person's fund and just say, hey, I trust John, so I'm just going to wire John fifty thousand dollars and see how the investment does. And a lot of people choose that route and they just send money to somebody else as long as they trust them. And the nice thing is you can diversify so you don't have to invest with one fund or one syndication.

You could go and give 10 different investors 50 grand apiece and take half a million dollars and dump it into ten different investments. And some of them might average 10 percent return on your money every year. Some might average you a 20 percent return on your money. I know we try to aim for 15 percent if we can do a 15 percent return every year. And that's from the time you both, in terms of the money coming every month and every year, we call it cash flow.

That's just profit, kind of like dividends. And then there's the actual you sell the property again someday and you get a big chunk of that. So that's the money at the end when you sell it. So combining those two things together, we can hit a 15 percent return. That's a whole lot better than the stock market. So if you're if you're aiming for a bunch of different investors, all trying to get 13, 14, 15 percent, hopefully on average, you you get a better return than you would in the stock market with really no with no effort other than signing a couple of papers and wiring money.

How about the inflation piece in this? How does that work? You know, one thing that we do like not to give you too much push back when I'm saying this, one of the things that we do like in stock investing is that it's quote, on inflation proof, at least to some extent. How does that work in real estate? Is that a fixed payment or is it just all about fixed pay? When you say your tenants or is it is it something you always figure out?

Is it just to compare to a CPI index? Like how do you guard against inflation? No, a lot of people out there are probably sitting there thinking, well, we don't have enough inflation.

Why is this relevant?

If you enter the 70s or 80s thinking we have no inflation, it's not relevant, let's just fix all payments the next hundred years, you're probably going to regret that decision. I'm curious to hear your thoughts on that, Gus. I don't know that there is a better investment vehicle than real estate when it comes to inflation. In fact, personally, ninety nine percent of the reason why I invest in real estate is because I am banking on inflation. We live in America.

The American government or economy has shown they will consistently print more money whenever we are facing a recession. Money's becoming worth less. You have to be investing it just to stay even. And real estate is I mean, at every single angle, Stig, it benefits you when there's inflation. So let me give you an example of someone who wants to go buy one hundred and twenty thousand dollar house and put, say, twenty thousand dollars down. If you borrow one hundred thousand dollars to buy an investment property, your payment with taxes, insurance, mortgage, all of it at four percent will be less than six hundred dollars.

You're probably right around five hundred and seventy five dollars a month. Your rent could be in the seven hundred eight hundred dollars a month right off the bat.

So the first way that you've now benefited is your risk is very low. Most people investing money can afford if they don't get a payment coming in five hundred seventy five dollars a month, that's your worst case scenario.

If your asset for some reason drops in price and it goes from one penny down to 60, it doesn't matter because your your rent is still coming in. You just wait. You're actually still making money every month. It's like a stock that pays dividends regardless of what the value of the stock is.

If you can hold on long enough, it will come back up, especially with inflation when prices go up, if that property goes up from one 20 to one 40, that's only an increase of what would that be like, 15 percent, 10 percent or so.

But that money you made on your investment, which was twenty thousand, is one hundred times increase. That leverage really helps you in that payment is locked in for thirty years at four percent, regardless of what happens with inflation. So you've won right there. Every year as inflation occurs, rents go up. We typically have one year leases so that you made seven hundred the first year. The next year is seven fifty, then eight hundred and eight seventy five.

And your payment stays at that five seventy five to six hundred number every single year. This is looking better and better for you while your property is also appreciating. This is one of the reasons that I love investing in real estate is I tell people you don't got to be smart, you just have to be able to hold on for a long time. It's like putting a baby in the water and then the tide will rise. That as inflation occurs and everything becomes more expensive.

Your payment is locked in for for the thirty years you have it. Until then, you can refinance it again if you need to, but you choose if you want to refinance it. We tend to look at that like that's risky. You're refinancing, you're pulling money out. You could lose it. Well, if if your rents have gone up to twelve hundred a month and your payment is six hundred, you can refinance and push your payment up to nine hundred and you're still in the clear three hundred dollars a month.

So there's so many ways that real estate protects you because of inflation. It's one of the reasons that I'm hugely bullish on why more people should be owning it. If you're not owning real estate and you're just banking on your savings to get you through, you're going to see that get wiped out. You can't control what the government does. You can just control how you invest the money that you've got. So, guys, let's focus on valuation, as we've talked about here on the show, you find the intrinsic value of a stock by discounting the cash flows back at an appropriate discount rate back into today's value.

Could you please just talk to us about the valuation in real estate and perhaps use a specific example from your previous deals? So the value of a property is essentially worth let's divide this up, there are two types of real estate we want to look at. There's residential real estate, which is like a house right by a single family house.

That house is worth what other houses have sold for.

That's the best way to say it, right? Like what's an iPhone worth? An iPhone really worth has nothing to do with how much it cost Apple to make it. It's worth what the competitors are charging, maybe a little bit more because it's a little nicer. Right. And so real estate in terms of residential houses and maybe duplexes and triplex is two and three and four units. They're all valued that way. What the neighbor's house sold for the house a mile away, sold for.

When we get into larger deals like commercial properties, like what I do today, I buy a lot of mobile home parks. I buy big mobile home like we have in America. We have this thing called mobile home parks. They're basically like little houses that are cheaply built and you can have one hundred or two hundred, three hundred a month on a property and they're all hooked up to the water anyway. People live in these. They're low cost. They're low rent is really just affordable housing.

And we have a lot of these. So I buy these. And when you buy big things like apartments and mobile home parks, they're valued based on the profit that they generate. And so there's a thing I want to go too deep into this, but there's Kapre, A.I. and all this stuff that we that we basically were asking the question, what type of return would an investor want on this property? If in the area every investor wants a five percent return, then that property is going to be valued.

Looking at all the income that comes in, all the expenses that go out, what kind of return are they making? It's value based on that. And they want to like, what's it worth at five percent if the average in an area, everyone wants 10 percent because maybe it's a little bit more risky area. So they need a higher return, then everything's valued on. What would give the investor who buys that a 10 percent return, just not to get too far in the weeds here.

But when I say that 10 percent return, that's without leverage.

So what would an investor without using a loan, what kind of return would they get on their money every year? And typically in America, between five and six percent is pretty normal right now. You can get down to the 3s in some area. You can get up to the sevens and some area, some areas. But typically, I would say five to six is a pretty normal what we call cap rate. And again, that's the return. So that's how you kind of value real estate is either the small ones, like the houses, are valued on what the neighbor is and what the neighbor sold their house for.

The larger deals are based on what the neighboring properties, the other commercial properties, what kind of returns they generate. So I bought a house, actually a true story happening right now. I bought a house eight years ago for sixty five thousand dollars because all the houses in the area were going around sixty five, seventy thousand dollars and some houses were up and eighty in ninety thousand dollars because they're all at nicer.

Some houses were down to twenty or thirty thousand because they were just dumps that were full of garbage but pretty average with about sixty five thousand.

So I bought it for sixty five thousand over the last eight years. Now it has continually gone up because more and more houses are worth more and more money around the area. People like inflation's carrying it up more and more people. The supply and demand is playing into it because more people want to buy. And I just talk to my real estate agent yesterday and he says that house now all all the neighboring houses, all the air in the in the neighborhood, they're all going for over two hundred thousand dollars.

So here I am. I bought this property for sixty five thousand dollars. I've been making several hundred dollars a month every month on that property for a long time now. And now it's worth over two hundred thousand dollars, maybe up to two fifteen. Why is it worth to fifteen. Because a lot of other houses, there's that one that's just like it sold for two twenty. That one is just like it sold for two hundred. That one just like a sell for two or five.

So we can get an idea based on that. That's again the residential side. Let's take a quick break and hear from his sponsor. This episode is brought to you by block by the preferred easy to use quick and secure cryptocurrency platform is available on the web.

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I'll pay it off. I hope it goes up. If it doesn't, I'm OK. So this isn't necessarily about outsmarting the market. It's really just waiting. And inflation, does that work for you? So when what he's describing is residential real estate, when you're buying residential real estate, what you do is you try to buy in an area that you think people want to live, because as time goes by and there's increased demand, prices will go up because supply in real estate, you can't just go like an IPO and a bunch of houses pop up.

It takes a while for houses to be built. You've squeezed some value out of the long term hold because you bought in the right area. The other strategy is you look for the messiest, ugliest, worst house in the best area. You buy it and then you make it nicer. So if every other house was selling for one hundred thousand when he bought it and he bought this one for sixty five because it was nasty and ugly and no one wanted to deal with it, he could have created thirty five thousand dollars in equity right off the bat, which then turned into two hundred thousand.

So when you're asking the question of how you value property, it's actually pretty simple. A lot of people get caught up trying to look at too many numbers and trying to figure out where migration trends going and what's the hottest thing. But really, if you just continually invest, buy houses in areas where you get a solid tenant and you don't have to worry and you wait, you see stories like Branden's pretty frequently. That's interesting and, you know, I think that story is a really good Segway to my next question, because we do live in a time with little to no interest rate.

What has been the implication of your portfolios in particular and what is the general implication for real estate investors being in this low interest rate environment? I would say it's good and bad for properties you already own when interest rates go lower, it tends to push the value higher because like Brandon said, you can pay more to buy that property and still get the return you want. So as everyone's like interest rates are low, it's hard to get a return.

I got to go invest in real estate. That creates more demand. You have more competition. So for stuff we already own, it's great the prices are going up for the stuff we want to buy. That becomes a little trickier. It's harder because more people are trying to buy it and the prices go higher because the debt itself is so cheap. You have to understand with real estate investing because ninety nine percent of the time is being leveraged, the prices are very sensitive to what the financing is.

In fact, we were saying there's two ways to look at property, commercial property, which is based on its profitability, residential. That's based on what someone else paid for. It literally comes from the financing. If you're buying a house just to live in the financers, looking at what does that person care about? They care about what my neighbors pay. Oh, I'm preapproved for four hundred thousand. What's the nicest house I can find for four hundred thousand?

That's what I'm going to buy.

That's why it's valued that way. When you're looking at commercial property, it's not bought by someone who's thinking, well, what's the best I can get? It's a more sophisticated buying who's looking at it like an investment. The value is based on the financier who's saying, well, if I'm lending you this money, how much money are you going to get in return? So I know that I'm going to be paid back. It's really important to understand that when you're looking at where am I going to go invest, how they're valued will determine how much money that you get.

In general, lower interest rates are very good for real estate. I think one of the things you have to be aware of is if interest rates go up, theoretically, values would come down. That's where you can still make cash flow. But you may end up what we call underwater, where you owe more on the property. You could sell it. Forces' can't get rid of it without taking a loss. Are that in this situation? Is that if that happens in our country, at least it's more than likely the government would just print more money, create more stimulus values, would go right back up because money would become cheaper.

So we feel like you've got a really good hedge if things go wrong with cash flow and you've got a really good upside if inflation continues to increase. I love your point, David. I mean, it's all about owning real assets, whatever those assets may be, and we can talk more about the finer prints, which we are right now in terms of real estate. But in this time, with everything that's been going on with the money printing real assets, I mean, that's really just key.

So as much as we use formulas to calculate expected returns for your investment, we also have another rule. The best way to test if a stock is trading at a good price to value ratio is, it seems, screaming obvious that it's a great deal. Meaning if you have to fire up an Excel spreadsheet to make calculations, it's just not cheap enough. So for someone that just doesn't have a lot of real estate experience, what would be your recommendation for a rule of thumb or a specific example for deals that you've made in the past for identifying something like this?

When we're talking buying like residential property, let's just say you're buying, I mean, we can get real complicated on commercial stuff like apartments, but the basic you buy a house, right?

There is money that comes in and there's money that goes out. I like to look at this, what I call the four square method.

Now, we're only on audio now, so you can't see it, but you can kind of visualize there's four square think of like dry in a box with a cross in the middle. So there's an upper left, upper right, bottom left, bottom right. So in the upper left, I like to say you want to record all your income. So how much money is coming in on the property? Now, normally that's just the rent. So there's a thousand dollars in rent.

Great. The bottom left. I always write down. So we're going moving down the box to the top left was income. The bottom left. We're going to write all of our expenses. So what do we pay? Well, there's taxes. We got to pay property taxes on the property. We got to pay insurance. Got to make sure if it burns down, we're going to be paid back. You got to pay for when things break down, repairs, things break.

You've got to pay your mortgage payment. You've got to pay that. You got to if you're going to hire a property manager like David talked about earlier, you got to assign a certain percentage of the rent for that. So typically, it's around 10 percent, sometimes a little lower, sometimes a little higher. But you want to if the rent's a thousand dollars, I'm going to write one hundred dollars a month for property management and so on. And it's not terribly difficult to figure out what those expenses are because you can just talk to the owner, hey, what expenses do you have?

You can talk to other investors in the area. What's normal here? So there's these expenses we want to account for. That's that's the bottom left of this four boxes. Then we go to the top right box and I'd like to say, well, what's my cash flow? And that's simple. It's just one your income minus your expenses. This is like third grade math, right? So your rent was a thousand dollars, your expenses was seven hundred.

OK, so your cash flow, that means the money that you can expect on average every single month, we'll say was three hundred dollars. OK, that's pretty good.

Three dollars a month or that would be thirty six hundred dollars a year. So now we know what our cash flow is. The final box that I look at then is called cash on cash return and and in real estate, what we mean by that is what's our percentage that we're making on our money from that cash flow? We just look at cash flow is thirty six hundred dollars a year. So how much money do we invest into this property? Well, for easy math, if we put ten thousand dollars into the investment and we made thirty six hundred dollars this year, that is a thirty six percent cash on cash return.

That's the most basic, simple way of running the numbers on a real estate deal that I can do. And it's just income expenses, cash flow and then cash on cash return. And for me, I like to see at least a 12 percent cash on cash return. I can make twelve percent on my money right away. That's not even counting the fact that real estate goes up over time. We're talking like basically dividend here. So if I can make twelve percent, maybe I'll go down to like eight or ten if I really believe in the property.

But like I'd like to make if I get four percent, that's awesome. Why twelve. I don't know. I just threw that number out there when I was younger and I've been holding onto it since and it makes it hard but not impossible. And so I still get the property getting paid off over time. I still got it going up in value over time. I still get all the tax benefits, at least in America. The government just like makes it so good to own real estate here in America.

I don't pay any taxes on my real estate. David doesn't pay any taxes on his real estate. You know, we pay a lot of money in taxes on is the money we earn from book sales or from a job or from commissions. The government loves the tax employees. They don't tax real estate investors much. So anyway, it's that simple. The Four-Square method, income expenses, cash flow, cash on cash return. That's how I run the numbers quickly.

We have software in bigger pockets that people use, but is a more fancy version of what I just explained. David, anything you want to add on that? It's really good, I think when someone's listening to that, they might be intimidated by all the different ways you make money. Well, there's your cash on cash return. There's your equity. Then there's your loan paid out. And then will it appreciate? Well, it won't be. Your best way to look at it is to say your cash flow is what protects you in case the market goes down.

It's a defensive metric. I am going to make more than it cost me to own the property so that I can continue paying that mortgage and saving up money for if something breaks or I have a vacancy, your real wealth will be built when you've paid your loan down over time and the value of the asset has increased.

And that difference is what we call equity. So I just make it really simple. Every person I've ever talked to that bought a house 30 years ago, not one of them has said, oh, I wish I wouldn't have invested in real estate. It doesn't happen. What every one of them says every single time is I wish I would have bought more. That's just what we hear constantly. So if you take that long game approach, I'm buying a house so that 30 years from now I look back and say, thank you, David.

That was awesome. You just paid for three of my kid's colleges, plus a new car for my wife and a vacation to Europe. I'm going to enjoy that. I made that decision. So I buy properties with the expectation that I'll feel really good later. And I make sure that they have a cash on cash return to cover me during that period of time while the asset grows. And if you just simplify it to that level, it feels much less scary to get started.

The listener might be sitting out there and thinking, well, I heard these stories, you know, Brendan's story and David's story, and David even hired a junkie or ex junkie being property manager and all the mistakes he made, he still made money. That's probably because David lives in a fantastic place with this particular state, has these tax laws, or he just like hit the market the exact right time, or he gained this knowledge eventually just allowed him to outsmart other investors.

I guess my question to you is a continuation of that would be, do you have to invest local? Sounds like that you started investing locally. Can you invest long distance? What are the opportunities here? So the market that I got started in is actually probably one of the toughest in our country to be able to make work, it's very expensive here. I live in the most expensive part of it. So I started earning this money, working as a police officer, but I would go invest it in other parts of the country where properties were much cheaper.

That was really my strategy is I realize investing in real estate is similar to the stock investing where what you're looking at are fundamentals, the market fundamentals, as well as the company fundamentals and making a decision based on that. Those work, whether I'm buying in Kentucky or California, the numbers Brandon describing are all the same.

So to me, one of the easier things to invest in because it works anywhere. It's not like the rules change when you go to a different area. Now, maybe when you buy a blue chip stock, it's different than if you invest in a tech company. Right. What some one of those is safer in one of those has a little more upside. We've got a similar thing with real estate, but largely it's the same thing. So what I described in that book is what I call finding your core for you need for people.

And if you have them, you can invest in any market. The first is a deal finder, which is typically a real estate agent, but it could be someone else. The next is a lender. You need someone to preapprove you for a loan and finance the property. The next is a property manager, but you can use that property manager as your scout. They know the neighborhoods, they know the area. They manage properties. They know what part of town gives them problems in which areas are pretty smooth.

And then the last is a contractor or a handyman, because in this investment class, you frequently have things that break and you need someone to fix it. And if you've got those four people, you can invest anywhere. Absolutely love that, and I love how simple you make it, guys, that, you know, this big complex thing, this blackbox called real estate investing. Absolutely. Love how you unpack that for our listeners. Now, let's talk about deal making.

We invest in public policy on the show and we can look up Abal and I think right now is trading around a hundred and seventeen. Now that I look it up and you know, it's up to us to decide whether we want that stock at that price or we can just come back tomorrow for another quote. Now, the flow is a bit different in real estate. Say that you found a property that you liked and you meeting with the seller.

And I haven't bought as much as much real estate as you guys. But I would imagine that one of the things that you could would often not agree upon that would be the price. And this does not necessarily have to be real estate investor investing for passive income. I mean, this situation could just happen for those of us looking to buy a new home. Just general. So you don't agree on the price, but what is your thought process going on from here?

In real estate, you it's not like the house is worth this much, there's a flexibility in everything and there's a lot of emotions at play, especially when you're dealing with with homeowners.

When you get in the commercial space, there's a little bit less emotion, but there's still emotion no matter what.

And so if you have a good real estate agent, for example, David here is actually a real estate agent. So he helps other people buy properties. A good real estate agent can help try to keep the emotion out and try to do negotiation for you. But there's a lot of negotiation in play. And so you think I only want to pay one hundred thousand dollars for the house? And the seller says, no, I want you to pay one hundred and twenty.

Well, that's why we get into a negotiation. And so then we say, well, I don't think it's really worth one penny. Look right here, all these other houses are only selling for one hundred. And then the person says, well, yeah, but my house is nicer than those houses. And you're like, OK, that's true. I'll pay you one five. And they say, No. One 15. And you say, hey, let's just meet in the middle at one ten.

So it's super important for us investors negotiation. So and at some point you get to a number, you're like, OK, we think we can both agree on this or you don't. So that's typically how real estate works on a David, you have a lot more on on that in the agent, but it's definitely negotiable. Everything is in real estate, which is actually one of the benefits of it. I can go buy a house that they're asking a million dollars for and I can buy it for eight hundred thousand dollars.

You can't do that with Apple. You can't just go and call up.

Well, not Steve Jobs anymore, but, you know, you can't call the board of directors at Apple and be like, hey, I'd like to get a 20 percent discount on your stock today, please. And they're not going to do it. You can get discounts on stocks, obviously, but it's not a personal thing.

It's not based on your negotiation skills. It's just based on your research. So little difference there, David, what you think? One of the ways that you actually do well with real estate is that you look for properties that other people don't want. In fact, when we Brandon and I are looking at deals, we are looking for what we call motivated sellers. There's someone who is doesn't want to own that property anymore and other people don't want to buy it.

That's one of the areas where I was describing that you have a little more control over how well you do is you can spend your time looking for imagine a stock that nobody else was buying and the company really needed to raise money. So you made them an offer? Well, I can't pay fifty dollars a share, but I can pay 40. And they may say, well, we need the money, so we'll take it. It's kind of like that with real estate when it comes to negotiating.

The wrong way to look at it is I'm just going to hire a great negotiator and go convince a seller to sell their house for less than what they think it's worth.

If nobody else is buying the property, you can get away with that. When there's other buyers that want it, that will pay more than you. It doesn't matter how good of a negotiator you are, they're going to go with somebody else. So one of our strategies is to look for properties that other people don't want. It's been sitting on the market longer than other people. One of the great ones is sometimes you can't get financing on a property if it's in really bad shape, if it's got a hole in the roof, if it's got leaks, if it's got too much dry rot, like a fungus that gets into the wood, you can't use a loan which eliminates a ton of your competition.

And if you can raise money from from other investors and go pay cash for it, fix those problems and then get a loan on it, get your money back out, you can get great deals. So that's another reason that we like doing this, because we have a little more control over our efforts creating wealth directly. Guys, this is this has been absolutely amazing training, this outline, thinking about, well, these are probably the questions that I should ask because I'm definitely no expert in in real estate.

So those are all the questions that I wanted to ask. But I also wanted to put you guys a bit on the spot there. What have I missed? Like, what is the one thing that I should have asked you guys about in terms of getting started into real estate investing? What should our listeners know? I was going to say that when we are describing these strategies right now, a lot of them are they are for a little more experience of an investor, you're going to go look at a property.

You kind of know it's worth less than the other ones around it. You're comfortable fixing it up to make it worth more. You don't have to start there. There's a strategy we call house hacking, which is when you buy a property and you rent out a part of that property to other people and you stay in it. So it could be a duplex, a two unit property where you live in one side, you rent out the other or you rent out two sides and you live in one.

It could be buying a regular house and renting rooms out to other people, or it could even be buying a regular house and splitting it into two units where you live in one and you rent out the other. And the reason that we love that strategy, especially for newer people, is that you are going to be making a rent or mortgage payment anyway. So let's say that you have to pay two thousand dollars a month in rent for wherever you're living.

Well, if you can rent out part of your property and reduce your overall expenses from two thousand down to seven hundred, that's the same as a thirteen hundred dollar profit. It's actually better because that thirteen hundred dollars is it being taxed like revenue that would be taxed normally.

OK, so it's better than thirteen hundred dollars and it's incredibly low risk. If you could afford that two thousand dollars payment you would have been making to live in the property and you've reduced it down to seven hundred. That's thirteen hundred that you can save to buy your next deal. And if worst case scenario you have to make the payment, you're just at par.

That's where you would have been if you as far from a financial position, if you didn't have the tenant and then after a year you can move out, buy another property, do it again, rent out both units, and now you've got a cash flowing deal. So what I recommend is if you're hearing this and you're like, I want to do it, but I'm just scared, don't go huge. Don't try to hit a home run. Start with something like that.

Get your feet wet, get a little momentum going. And once you start to recognize, oh, there's a pattern to this, I'm just doing the same things over and over, then maybe you go take on some of the strategies we've talked about earlier. I absolutely love that example, and I think it's a good equivalent of what we talk about here on the show, whenever new investors are saying, I don't know if I'm ready. How should I get started?

I have a pool of money. And typically I would say something like put one hundred dollars into the stock market, but ten dollars into the stock market. Try to figure out how do you feel whenever that drops two percent? Some people, if it's 100 bucks, you know, it's oh, God, I could have for that two percent drop. I could have bought a pasta or something. This I can't do it. And you're just better just to do for for one hundred bucks then all your money.

I kind of like what you sat there for. Most people, it's it's difficult to say, oh, let me just make my fee. When you buy an apartment house, let's see how I feel about it. That's probably not the strategy for you, but I really like how accessible you made that in terms of, hey, rent out a room, see how that goes. How is it to have a tenant? What kind of legal work do you need to do?

I absolutely love the example. So, guys, where can the audience learn more about bigger pockets? There's a Bigger Pockets podcast, of course, which is the real estate show that David and I hosted every single week. Been doing it. Now we've got over four hundred episodes and we're usually in the top ten of business on iTunes. So you can find us anywhere podcasts are at or you can follow me personally at Beardie Brandon on Instagram. And like a 13 year old girl with my Instagram, I'm on there all the time.

David, where you at? Yeah.

So if you guys want to hear Stig's interview with us, which came out great, it was Episode four 15 on the bigger podcast podcast. I'm listen to him crush it. I'm also on the Bigger Pocket's website, as well as my Instagram, which is David Greene. Twenty four. I'm really all over social media at David Greene. Twenty four. So Facebook, LinkedIn, Instagram, Twitter, all of them. There's a E at the end of green when you're looking me up.

And I just wanted to say because we got a lot of requests here from audience like why don't you guys do videos? And I just want to debunk that myth. Or the reason why we don't do it here on our show is that we're not as good looking as as Brandon and David.

So they actually do videos, all the interview. So if you like to see how the sausage is being made, obviously the place to go. All right, guys, thank you so much for making the time to speak with Preston Me here on the Investor's podcast. All right, so we're letting Brandon David go. Let's check in with Robert Leonard, a host for a real estate investing show here on the Investor's Podcast Network, and hear what he's up to this week on the real estate show.

I talked with Justin Eden about his journey into real estate investing and how he looks at it through the lens of a home inspector on next week's episode. This coming Tuesday, I'll be talking to Peter Politesse for one of my personal favorite episodes. Yet Peter has overseen over 80 developments, encompassing thirty nine million square feet with an estimated gross completion value of over 17 billion dollars. We talk about his private equity fund and this concept of luxury social living arrangements. I think this concept is very fascinating.

I love learning about it and I wouldn't be surprised if I launched my own private equity fund in the future to implement a strategy similar to Peter's. I'd love to have you guys come check out his real estate podcast and join me each week on Tuesdays for new episodes.

All right. Back to you, Steg. So if you want to subscribe to real estate investing by the investors podcast network or any other show, simply go to Spotify, Apple podcasts or whatever, you listen to your podcasts and just search for the investors podcast. You can find real estate investing. You can find our show. We started doing this millenium testing the guys. That was all the press that I had for this week's episode of the Investors podcast will be back next week with a brand new episode of the Investors podcast.

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