Diversify in a Shifting Market - Episode 56
Melina: Welcome to Flippin’ Off, a purpose-driven podcast about flipping houses and making a difference.
Melina: Just kidding. I got really silent and just watched everybody looking at me. "Oh, God, it's silent." People don't know what to do with the silence. All right. Hey, everybody. Welcome to the "Flippin’ Off Podcast." Melina Boswell, here co-founder of New Wealth Advisors Club. And today in the studio, I have my guys with me again. It's always Melina and the guys. I don't know. I feel like we should...anyway. So Frank Luna.
Melina: Is that all? It's all you got?
Frank: Hello, everybody, and how are you doing?
Melina: Oh, okay. That's good.
Frank: Hi, Tim. Hi, Oscar, Molina, John, hi. Amir in the corner.
Melina: Josh in the back. Josh in the back. I have Oscar Solaris.
Oscar: Hola. Buenos Dias.
Melina: Tim Wilkinson.
Melina: Well, and John Slater.
John: Good morning. Good morning.
Melina: All right, and Amir.
Melina: Okay. All right. Well, welcome, guys. Today we're talking about...we're just kind of continuing the conversation that we recorded last time about just the changes and the softening of our market, our real estate market. We kind of teased you guys a little bit by saying, you know, you need to be diversified and what does it look like to have diversification inside of a market that is shifting. And we started speaking about it afterward and said, "You know, it's not just like maybe diversify in the way that we're used to in the traditional sense, right? Diversifying your assets." So putting your assets into different things.
We're speaking specifically about diversifying your real estate strategies. So we wanted to talk a little bit today about what some of those strategies are. But I think that in order to get there, we need to start out with some very basic information, some basic facts. So there's certain truths inside of real estate investing that never change, right? So for example, as real estate investors, our goal is to buy low, right, sell high, and then the in-between is what we call spread and that's where all your dreams come true. That's what I always say.
And so in that, there was also another conversation that I have consistently and constantly with my students, which is this that when you buy low, that's your acquisition. And you always make your money on your acquisition, right? And then you get paid on your exit. So the paycheck actually comes on the exit. But if you don't buy right, then you end up in a bad situation and that's where most people end up failing as real estate investors is because all they're looking to do is acquire the property. And there's this miss I believe especially inside newbies or new investors' mindset.
And I think a lot of it has to do with all of the commercialism that's, you know, happening around real estate investors. And I was talking to somebody the other day, and they said, you know, it's a sure-fire fact that we were getting ready to enter into a down market is that everybody's a real estate investor coach right now. So everybody is a coach. And when everybody is a coach, then you know the market is like in serious trouble. I see some people that I barely trained not that long ago calling themselves a real estate coach, which is fantastic. I say, "May all your dreams come true. God bless you. I hope that works."
But the reality is that real estate investing is not something to take lightly. There is risk involved. There is inherent risk in any kind of investment that you decide to get yourself into. It's not just taking an ugly house and making it pretty, and then making 40 grand in 30 minutes, and it gets recorded on HDTV. That is all awesome. I'm totally good with that kind of business model. But I believe that our audience are people that are really doing real estate that are out there like grinding it out. This business is very, very simple. But it's not easy, right? If it were easy, everybody would do it.
And there's certain times in the market I think that are much, much easier, right? So, you know, we experienced this. I still have people that walk into the office and say this to me, "Oh, I was doing so great, you know, in 2004, 2005, and I lost everything in 2008. And I know the reason that that happened is because people were not truly informed and educated on real estate. You know, it was one of those times where if you bought a property, especially in California, and you could buy a property and one year later it would go up in equity, and then all the sudden you'd have all this money. And then you could do that again, over and over and over.
And based on that model, people called themselves real estate investors. And we know that's not the truth. That is just lucky, right? And writing the market, there's nothing wrong with that. That's completely okay, except that when the market goes down, what do you do then? So you have to prepare and be able to look ahead and look forward and not be too greedy, I think, you know, and keep your common sense about you. We're talking about building a business here that's a real business and it's really no different, frankly, than kind of, you know, owning a job in lots of ways. We just happened to be real estate investors.
And so we thought today we would talk about the different strategies that you utilize inside of real estate. So if the idea is you make your money on your acquisition, you get paid on your exit, what changes when the market changes? So who wants to talk about that? What changes when the market changes out of that, right? We make our money on acquisition. We get paid on our exit. What shifts? Does the acquisition shift?
Frank: I don't think the acquisition shifts, but the exit definitely shifts, right? So like you were saying, initially the thought is "I'm gonna rehab this house and I'm gonna sell it. So my spread is my spread and I know what I'm gonna make when it's done. Now, it's, well, my spread may not be as big, but over time it could be. So now I step into a solid acquisition amount that still leaves a little bit of a spread there, because I have some equity built in, but I'm gonna go for a longer term now." Maybe it's two years, maybe it's five years, maybe it's 10 years? It depends. So your acquisitions still matters, right, the acquisition is still important. And it's really still where you make your money. It's just now what am I gonna do in between acquisition and sale? And that's really where the dynamics shift. And then when am I gonna sell? It's no longer in six months. It may be in 12, it maybe 24, maybe 36. It just depends on the acquisition.
Melina: Right. You could also so like, for example, you know, one of the things that we talked about a lot inside of our club is, you know, basic exit strategies, right? I would say in the last five years, I'm just gonna say the last five years, that's when most of us, you know, have been really active in the market. The number one exit strategy has been what for you guys? Like what do you think you've done...you probably know. I'm sure you know. Like, I'm sure you know your numbers. See, you probably know, hasn't been more...like what is that? What's been your main exit strategy?
Frank: For me? It was it was definitely rehabbing and selling. So it was selling to a retail customer.
Melina: So buying, fixing, flipping?
Frank: Fixing. Yeah. Five, six foot.
Melina: Right. And Tim, what about for you?
Tim: Mostly wholesale. Only recently maybe the last year and a half, maybe two years have I spent any time in the rehab section. But most up until then, it was mostly just wholesaling out to somebody like Oscar.
Melina: Right. Right. So and that's interesting, isn't it? So and now, let me ask you this. Does that change when the market shifts? That's a good question, right?
Frank: I don't really think it shifts. For me my initial thought when you said "What changes?," right? If we buy low, sell high, and we get paid in the middle by that spread, at the bare minimum what changes is just the time frame, are we gonna fix and flip this in 30 days. Are we gonna fix this and flip this fix and flip these or 30 years hold it rent it, cash flow it, do something else with it for the next year, 10 years, and then sell it and get a big equity check at the end? So that's...from a non-strategy standpoint, that's really the basics of what changes is just the timeframe.
As far as if I'm looking to do a deal, right now I wanna be in that position where I'm holding that property. But if I was still wholesaling, then that doesn't change anything for me. It just changes maybe my buyer, because maybe I'm not gonna wholesale to Oscar who wants to rehab it because that doesn't work for Oscar. But maybe now you can wholesale to me, because I want to be in that market of staying in for the long haul, and cash flowing and running other businesses in there.
Melina: Oh, that's so exciting. I don't know. I get chills. Does anybody else get chills? Like I'm so excited for the market that's coming right now. For me personally, like I'm so looking forward to what's happening inside the market. I feel like every time...you know, I always say I love/hate real estate, right? Because I love real estate but, you know, I don't know I don't necessarily like all of the red tape that goes into real estate but I really do love homes. And so I really can walk into a property and I experience something in every single property that I walk in. And I love the idea of what I what I feel when I walk inside of a property, you know, properties, houses have energy they really do.
And so some houses have like great energy and not all houses do. So I know it sounds ridiculous but sometimes I'll make a decision on whether I want to keep the house based on the energy that I sense when I walk in. I'll walk in and I'll say, "Oh, I can see this, this, and that." That's what happened to me with the property that you go have in downtown Riverside. I walked in and I was like, "This house is so great. There's so many great things about this house." I've also walked into beautiful homes and said, "This is a gorgeous home but I can't stand the way it feels. Like the energy for me is not good." So I'll out of it.
So for me personally the idea of having a longer-term exit strategy is exciting because the energy of houses really means something more, right? Does that make sense? And I don't know if that just happens. I think it just happens with time walking into so many houses, walking into so many properties and you just feel things, you see things that maybe wouldn't have seen that long ago, right? Does that make sense? Let's talk a little bit about the number one strategy that we are focusing on right now. Should we share with everybody what we're thinking about right now?
Melina: Yeah. All right. So who wants to talk about it? One of y'all. Somebody.
Frank: Everybody look at eachother, yeah. Well, we're all looking at doing Airbnb. [crosstalk 00:11:01] I'm gonna list them, properties that are coming in that are potential Airbnb. I've been doing all this research. One of my properties that I have in the market actually I've rented out the room through Airbnb four times now. So there's a market for it.
Melina: Without really even trying?
Frank: Oh, yeah. I guess I didn't...without even really knowing what I was doing. It was simple enough to set up the app, the Airbnb app. That was easy, right?
Frank: And I definitely needed some help from my wife to come in and decorate and make the room look like...I don't know, I never did anything like that before. So once we started doing that, I realized that's actually lot of work. It's not easy. There's this potential but it's not as easy as maybe some of the YouTube or infomercials like people are selling stuff to make it sound so simple, but there's a lot of work to put in. I mean, you have clients coming in nightly, two nights at a time. You gotta clean up. You have to make sure all this stuff... You have to meet them, check in, check out, make sure they didn't steal anything. There's a lot that goes into this. So having inventory to replenish whatever they used up or stole, you know, [inaudible 00:12:23] tracking device on some stuff. But there's a lot to it. It's not simple, but it's definitely gonna be worth it. I can see the returns. Just getting the system and knowing what to expect. You know, the pitfalls, there's definitely some of those. But I'm excited about that.
Melina: Yeah, for me... What, Tim? What were you gonna say?
Frank: And why are shaking your head at me, Tim?
Melina: He's laughing.
Tim: I'm laughing because Frank is funny. And it totally made me think of somebody renting Frank's room and taking off with the monogram, the monogram robe and the towels like any other hotel room, you know?
Melina: That's so funny.
Frank: That's exactly...you pictured it right.
Melina: Well, you know, one of the things to be thinking about, like for short-term rentals...and I know you say Airbnb, I know there's a lot of other ways to market your short-term rentals. But I know there's competition out there, right? One of the biggest questions is what are you gonna do? What sets your property aside from everybody else's property that are out there? So if somebody is looking to come to Riverside, for example, and they look at Airbnb versus a hotel, right? Like what are the things that they're looking for?
Frank: You know, we had a conversation about this, right? And I agree completely, that it's not just a place to sleep, it's an experience, right? So you have to be able to really give them an experience that, I will say, touches all their senses, right? So there's stuff they can look at. There's artwork that they can purchase. There's things that are gonna be there available to them. And also Riverside is an example where...you grew up in Riverside so you know the city really well.
Frank: So, yeah, let's market that, let's use that. Let's present to them what they should do in Riverside, what the attractions are, where they should go eat, those types of things, right? So now their experience is that much better, that coupled with what Frank was talking about of providing the right things, right supplies and so forth for people to use. So I think it's definitely an experience and that's going to let the word spread out, right, and bring them back and return customers. And it's always right, any business, return customers is... You know, we talk about first money. First money is the first time they show. Second money is always easier, right, because they already experienced it and as long as you did right, second money is cake.
Melina: Exactly, right, yeah. And I don't know, I'm a big, big fan of short-term rentals. And I've spent quite a bit of time in them because I like to drive. So I'm like truly that person. Like the beginning of this year, I just went on, I think I drove...I wanna say it was 3,500 miles like in a span of like, I don't know, 6 weeks, something like that. Not very long. I drove a lot and I love that. And so I'm the person that will be driving down the 15 freeway, and be like "I need to...I'm gonna stop in some like crazy place," and I'll pull up my Airbnb app, and I'll be looking for like the coolest place that I can find. I don't necessarily care that it's the nicest, but I'm looking for a real experience.
So if I'm somewhere between California and Idaho, for example, like I could be hitting in Arizona and Utah and Nevada and I wanna have an experience in those places, and so I did a lot of that. So I have stayed in a lot of Airbnb and so I know what is what I think is important and what isn't important. And I know immediately as soon as...I can tell by looking at somebody's ad, I have a general idea. And I think one of the things that frustrates me the most is when people...I think they false advertise, right. You know, we just experienced this. We had just stayed in an Airbnb a couple weeks ago, right, Oscar? And it was like... Oh yeah, John.
Frank: The pictures were awesome.
Melina: Yeah. We all left with like nasty flea bites and, like, it was bad.
Frank: But we had fun.
Melina: Well, we always have fun. Of course, it's not gonna ruin our time. However, that will be a place I will never, ever, ever go back to. So I'll be back in that city for sure to stay but I will never rent that house again ever because it was an awful experience. And the location was fine, but I don't really care. I'd rather stay further, you know, from...because this was supposedly on the beach, but it was so like dirty that you couldn't even experience the ocean. So there's things like that that maybe... Then this house has the unbelievable potential because of where it's located.
But the way the owner set up the entire rental process was awful. Everything was broken. Soon as we walked in, you know...and this is like, one of the things. You know, so we walked in and went to open up the shade. The moment we touched the shade, the whole shade fell. And then there was this panic moment. "Oh, my God, the shade fell. We obviously didn't do anything to it." So you have this moment of panic, like, "Oh, gosh, they're gonna blame us for the shade being broken. But it was clearly broken when we walked in there.
So you don't want your guests to experience that because you don't take care of your things, right, because now you're...we were uncomfortable so that it was like, "Shoot, take pictures of everything, like document everything, make sure the date and time is on there right now so that they can see," rather than just everything being fixed, and/or if there is a problem stating, "Hey, by the way, the shades don't work. We know that. We're in the process of getting them fixed," but that would put me as a as a renter at ease, right? So if I'm spending $500 a night, I don't wanna have a shade fall at the touch of my hand. Right?
So in terms of diversification, we think that short-term rentals are rate and the potential there. There's so much to know about short-term rentals, right, the planning that you do. So like, I know, Frank, you've been doing a lot of research. What are what are the things like the numbers, maybe, for example, that...what are the like basic facts that you need to have in order to set up a short term rental? What would that be? Can you give me a couple?
Frank: Well, if I'm gonna be paying a mortgage, obviously, I need to know if I rent this thing out, will it cash flow. Most of the short-term rentals will definitely cash flow just because of the nature of it. Now, when I'm looking at city to city, all the different occupancy rates, you know, there's busy seasons where it's 100% occupied and then there's time where it's not. So what I'm seeing is the best ones are literally like 50% occupied across the whole year. And better than that is great, but that I think is your minimum you're looking for. If you're gonna do a vacation rental, you wanna see 50% occupancy and that'll cover you. And you start those markets where I'm seeing like 30%, and I want to avoid that. So there's that in the numbers. So once we get past that, now you have to set up the room right. And there's... I don't know if you guys noticed, I'm not a detail person.
Frank: You know, just like little things I'm like...Kathy is like, "This is their room and there's no shades up." Like what do you need shades for installed in the bathroom?" She's like, "Well, they're gonna sleep in the bed. They don't want people to be able look at them through the window." Am like, "All right. Well, let's get some shades then." It's just those little things that it wouldn't...like me, I'm laying in that bed and someone can look at me through, let them see me sleep. I don't care. The door's locked.
Tim: I got my eyes close. I'm good.
Frank: The door's locked.
Milena: The door's locked.
Frank: And what I do got? You know, but Kathy says, "No, they need privacy. They need [inaudible 00:19:57]" If they won't open the shades, then they can do that. I'm like, "Okay, yeah, right. Cool." So there's all these details that Kathy helped with, you know, but I wanna be able to do some more, actually acquire property with a purpose of having it as a short-term rental.
Melina: Yeah, I love that. So what you're saying is that the trick is 50% occupancy. So 15 days a month is what you need to calculate your numbers on. So if you are acquiring mortgage or you have any kinda financing on the property, you need to make sure that that monthly payment will be able to be covered if your property is rented out 15 days a month.
Melina: So that's a great tip. Yeah, I like it.
Frank: There's a lot of them. And, I mean, it's a completely different business. And from looking at it, it looks like we're still figuring out new ways to take advantage of it. So I guess that you have your basics, and then there's so much more information, expanding the knowledge on that.
Melina: Right. So, yeah, and I think that's a really key point as well is that what we're actually speaking about is investment but it really is diversification. So one of the things I learned early on in my real estate career is that, you know, if you're thinking about buying rentals, you have to think of it in this way, you're buying income. You're buying a stream of income. So the question is how much are you gonna pay for that stream of income?
The beauty of the short-term rentals is that you get a really high return on your investment, much higher than you do on just a single family residence with long term rental, right? It's kinda like the idea of buying apartments, the idea of, you know, if you're buying an apartment building, you're just buying, you know, a stream of income. So how much are you going to pay for that stream of income, right? And so, you know, that's a great question.
Well, one of the things that a lot of people will say is, "If you're looking at long-term rentals, or if you're looking at buying and holding, you shouldn't hope for cash flow, like income kinda cash flow." So as opposed to, you know, $100 or $200 a month, that's not really income, right? That's like that's nothing. I think if you're cash flowing on a property for a couple $100 a month, you should put that money back into the bank account that manages that property, because the chances are you're going to need to take that $200 a month to put it back into that property. That's a strategy that we utilize inside California because cash flowing a property for actual income is very difficult to do. We buy rentals in general for long term equity. So the idea is that you have a tenant who is a renter who is paying off your mortgage and you get to experience or cash in on the appreciation or the increase in value, which creates equity for you. Somebody else is paying off the asset.
But what I'm experiencing now is that we get both in California. I mean, do you realize that? That's what we're really talking about. So you could go to someplace like the Midwest where the properties are much, much cheaper so you can have a higher cash flow so you could put down the same amount of money in the Midwest as you could in California. You're gonna experience two different ways of wealth, right?
California, you get to experience equity, increases in equity. In the Midwest, theoretically, if you put down $50,000, let's just use a $50,000, right, $50,000 in California isn't going to buy you real income. But it'll buy you great appreciation. In the Midwest, $50,000 may buy you a very nice stream of income, right? The idea that you can get both of those in California right now is, I mean, kind of amazing. It's like, think about that. We can now buy properties that we create real income in and we get to experience the appreciation.
Frank: So, you know, I agree with you. But I also think that that's what we're experiencing because of how we acquire properties in what we do, right?
Frank: I don't think that's a general rule for everyone that's out there in California investing, right, because also there's a very different dynamic with what we do and what we teach and how we approach things, right, where a lot of people are just looking at MLS. They're still doing the normal, traditional things to get their properties, right? It's like one that's been sold right now. I think they were looking for 360 on it, right? Didn't leave a whole lot of margin. And that left like a cap rate of like 5% or something silly. I don't agree with it.
You should be at 8% or 9% and you need to do that by the acquisition, how you create the opportunity, which is where we come in, and that's what we teach people is how to do that so that you can actually experience what most people think is impossible in California, right? So it's big difference, I think.
Melina: Yeah, I wonder if everybody gets that. Like I don't know. Tim, what are you thinking? Because you're the engineer guy. So I'm watching his mind go ring, ring, ring, ring, I see his eyeballs flopping all over the place like there's spreadsheet in front of him.
Frank: The truth is that that's exactly what was just happening and I have all kinds of ideas for a whole new business model that I can't wait to share with you guys.
Melina: Oh, my God.
Frank: But I can't share it here. But literally, you just in this conversation I have an idea for some stuff. But I think it's pretty exciting. I'm excited about it.
Frank: Yeah. I'm gonna share with you guys when we get done with this podcast.
Melina: Yeah. You know what's funny about like I wonder if you guys are thinking, "Who is that person speaking right now about all the numbers?" Are you wondering about me? Like, "Oh, this is..." where you're thinking, "Do I know you?" I appreciate that. Were you wondering that?
Melina: John was looking at me like, "Who are you?" No?
Frank: What happened to you?
Melina: So...go ahead.
Frank: I was just gonna say we've been having these conversations for a few weeks now and I was not questioning any of that.
Melina: Oh, okay.
Frank: We'll just say that.
Melina: Which sometimes I'm thinking.
Frank: Everyone [inaudible 00:25:46].
Melina: You were in there?
Melina: Oh, okay. Well, I do know that...I guess that's when I was saying last time we recorded I was like, "Oh, my gosh, you have no idea how exciting this market that we're getting ready to enter into is going to be."
Frank: So many different ways to do this now than just through a conversation, you know, light bulbs hit and ideas come about. So it's good.
Melina: I feel like we should probably end this podcast because I'm just dying to know what Tim has to share with us. So...
Frank: Oh, cliffhanger come on.
Melina: Yeah, Cliffhanger. So maybe next time we come on and record and we'll share with you exactly what it is that Tim had a light bulb moment on. But I'm really, really excited. The last thing I wanna say is this if you ever doubted the power of the mastermind, this is proof right here that the mastermind is very, very real, which is, you know, people coming together having a conversation about, you know, that I know, thoughts that go along and float around in my mind all the time. And I have aha moments.
And sometimes you just keep those to yourself and then they lose their power. But when you can just think out loud and share what your thoughts are and what the value that that brings together people that are in the middle of the conversation is just incredible. And I think that's what makes our group and our club just like so awesome.
Frank: It's why what we do.
Melina: Better believe it. So, all right. Well, this is the Flippin Off podcasters. We're flipping out, flipping off, and flipping up.
Man: Flipping burgers [SP].
Melina: Yeah, whatever. See yah.
Melina: I'm Melina Boswell, your host of the "Flippin Off Podcast." I really hope you enjoyed it. If you did, we'd love for you to subscribe. Give us a five-star rating and tell your friends all about us. You can find more episodes of the "Flippin Off Podcast" on Apple Podcasts, Spotify, Google Podcasts, Stitcher, or wherever else you'd like to listen to awesome podcasts like this. If you like what you heard, we'd really appreciate it if you follow us on Facebook and Instagram and tell us the stories that you'd like to hear. Tim Jackson is our senior producer. Luke Jackson is our editor. Josh Mauldin is our producer, sound design by Frequency Factory. Our executive producer is Mind & Mill. This was all created by Dave Boswell for New Wealth Advisors Club.