169: Real Estate Investing Success Through Great Timing and Effective Deal Analysis

SHOW NOTES FOR EPISODE 169: REAL ESTATE INVESTING SUCCESS THROUGH GREAT TIMING & EFFECTIVE DEAL ANALYSIS

Leaving their lucrative, fast-paced silicon valley careers to pursue a business they knew very little about was a scary move — but it proved to be one of the best decisions of their lives.   In this episode, you will hear how J. Scott and his wife Carol’s decision to chose family over careers, using real estate investing, gave them the financial freedom and time they wanted to raise their kids and live the quality lifestyle of their dreams.

What You Will Learn

• How J and his wife Carol transitioned from two lucrative high tech positions to successful real estate investing business partners
• How choosing the right priorities in life, can help you succeed in more than just financial success
• What are the common mistakes most newbie flippers make
• The critical advantage of market timing and how you can use it to maximize your profits
• Why J does not like to write a strategic plan for his investing business
• Why people get overwhelmed with deal analysis and how it can actually be a very easy process
• What most people overlook when analyzing a deal
• What are the three things every investor must know to succeed

About Our Guest

J. Scott

J. Scott (he goes by “J”) is a full-time entrepreneur and investor living in the suburbs of Washington, DC. J is an engineer and business guy by education and spent much of his early career in Silicon Valley (California), where he held management positions at several Fortune 500 companies, including Microsoft and eBay. In 2008, J and his wife Carol decided to leave their 80-hour work weeks and the constant business travel behind. They quit their corporate jobs, moved back East, got married, started a family and decided to try something new. That something new ended up being real estate.  In the past nine years, they have bought, built, rehabbed, sold, lent-on and held over $40 million in properties.  J runs the popular website 123Flip.com and is the author of three books on real estate investing, including his best-selling, The Book on Flipping Houses. His books have sold over 100,000 copies in the past five years and have helped investors from around the world get their start with real estate.

More About J

• In 2007, met his future wife (Carol). Both worked long hours and traveled a lot.  As their relationship got more serious, they realized that their face-paced, constant travel lifestyle would not be ideal for family life.
• Made a decision to get out of the corporate world, move back east to be near family and wanted to have their own business that they could control their time and income.
• Mid-2008 moved to the east coast (Atlanta) and the economy was not good.
• Wife saw TV commercial about flipping houses so they decided to give it a try
• Bought their first house on the day they got married. Signed closing papers at noon, got married in the afternoon
• They saw flipping not as a business but something to do while they waited for a business idea
• Two weeks later, bought 2^nd house and within a year, they had bought/flipped 14 houses
• They both had no experience with real estate (outside of the home they both bought when they moved to Atlanta) and neither had rehab experience as well

From Hobby to Business

• Both J and his wife had strong business backgrounds and they decided to use that business experience to pursue house flipping as the business
• Started delegating construction-related aspects of their business to people who had that skill, while they focused on financing and other aspects of the business better suited to their skill sets
• Homes they were buying were between $30-60,000
• Typical rehab for each home was $15-20,000
• Reselling at $100-110,000 range for a profit of $15-20,000
• Did 15-25 deals per year
• All deals were within a 5 square mile zone in Austell, Georgia
• Almost all the homes they flipped were foreclosures
• First 3 years of their business, purchased over 50 houses and all but one was a foreclosure
• Each house had an average 3-month turn-around from purchase to rehab to sale. This worked out well because, at the time, most buyers were FHA buyers and required a minimum 90-day ownership period.
• Because they were the only ones flipping houses in that region, their sales shaped the comps in that area. This lasted until 2013 when increased competition caused them to branch out

Move to D.C.

• In 2009-2011, they had two children
• They were not thrilled with the Atlanta schools and when the kids reached school age, they decided to move to DC, which was close to family (J grew up in Maryland and his wife was from upstate New York)
• After they moved, they expanded their business and geographic reach (30-40 deals in Milwaukee) so where they lived was not as critical to their business

What he’s Currently Doing

• Still flipping but down to 10-15 flips a year
• Doing more buy and hold
• Picked up a 38 unit multifamily
• Also owns some SFRs and duplexes
• Even doing some New Construction
  • More capital intensive
  • Cycles are longer (permits, etc.)
  • Rarely any surprises (within 1-2% of budget). Whereas, with flips, you can be off by 5-7%
  • Easier to forecast profits
  • Mainly doing “in-fill developments” – finding a property, tearing it down and building from the ground up. One house at a time.
• Other Business Areas
  • Lending
  • Note deals
• Doing what the market best allows him to do

Shift to Multifamily

• The original plan for their business was to go right into multifamily but market conditions at the time dictated that flipping was the better route
• During the early years, in Atlanta, there was little multifamily opportunity in that market
• 2015, they reignited the thought but competition in multifamily was still steep
• After they moved to DC, they started looking in the 100-200 units but found more opportunities in the 20-50 unit range
• They currently have a 38 unit and also a 16 unit under contract

Biggest Mistake

• J feels, If you’re always doing your best to make good decisions, it’s not necessarily a mistake
• The first flip deal they did, however, stands out
  • They bought the property in 2008
  • They over-paid about $10,000 for the property
  • Underestimated renovation costs by $15,000
  • Thought they could sell it for $115,000 (over-estimated)
  • Held onto it as a rental for 2.5 years
  • Tried lease option, lease purchase but buyers couldn’t qualify for re-financing
  • Renovated it again
  • Eventually sold it in 2011
  • Made $1,000 on the deal
  • Made every mistake you could make on a flip project

Biggest Success

• Good timing in the market
• Built good relationships
• Good reputation
• Developed a good brand
• Owe success to good timing, surrounding themselves with good people, doing the right thing, having the right attitude
• J may be the face of the business but he attributes 90% of their success to Carol, who is brilliant at marketing and working with people.  She has a great personality and can build great relationships that often end up in great deals.

Deal Analysis

• For buy ‘n hold deals, people get tend to get overwhelmed when doing the analysis part of the deal
• The reason – they don’t decide up-front what their goal is for buying the property
• Many metrics to look at to come up with your goal:
  • Cash flow
  • Costs to purchase – pay cash, finance
  • Tax benefits
  • Build retirement for the future
• If you know what your goal is, going into the deal, it’s easier
• For example
  • I have $500,000
  • I want to make 10% return to generate an additional $50,000 in income a year
  • That is easy to measure when you analyze the property
• Or
  • I want to build $100,000 in income in 30 years
  • I want to buy properties now and will have them paid off in 30 years
• Or
  • I need $20,000 in tax write-offs at the end of this year
  • I’m going to buy this property knowing that it will generate $20k in tax write-offs
• If you know your goal upfront, you can ignore a bunch of other metrics
• You can focus only on the metrics for that goal

Setting Your Criteria and Goals

• Higher returns and higher risks go hand-in-hand
  • The percentage return you get on any investment is directly proportionate to the amount of risk on that investment
  • High-risk factors:
    • Older building
    • Rougher part of town
    • A lot of renovation required up front
    • Economically depressed area (high unemployment)
  • If you set your criteria returns high, you had better be more risk tolerant
• When people look at a deal, they leave out a lot of factors
  • You can look at the financial metrics for a property and they can look great
  • But are you looking at the headaches
    • Located in bad part of town
    • Tenant issues
    • Higher turn-over
  • Headaches people don’t see
    • 100 plus units are getting returns in the 5-8% range
    • 20-50 units are getting 11-14% range
    • Sounds like you should go for the lesser units but…
      • 20-50 units are tougher to manage
      • Can’t have onsite managers (because it doesn’t yield enough cash) but still need someone to be there a lot to deal with maintenance issues
      • Can sometimes get a tenant to sit in office and take applications
      • Hire a PM to be onsite 2-3 hours per day as opposed to full-time
      • Much tougher to manage
    • Higher yield, higher risk
  • To deal with this issue
    • Look closely at the financials
    • Think of property management
    • Who will your tenants be?
    • What type of tenant turn-over will you have?
    • What will your Cap-X be? (septic vs. sewer?)
  • J’s criteria for single-family rental properties
    • 12% cash-on-cash returns
    • For a $50K property, he is getting $6,000 annual return
  • J’s criteria small multifamily properties
    • Low-income area of town
    • 15% cash-on-cash returns
    • His goal: wants $100,000 in equity after repairs
  • Analyzing big deals is not too different from small deals. Collecting data for big deals is tougher
  • J has analysis tools on his website at 123flip.com. When you sign-up for his newsletter, you’ll get links to all his tools.  He has a free Buy ‘n Hold spreadsheet

J’s Funding

• Has partners for many deals
• But likes owning things free and clear
• Also believes in using leverage wisely
• He’s generally conservative in his financing
• May pay cash up-front for a property but may re-finance later
• For financing, he uses:
  • Banks
  • Portfolio lenders (local banks)
  • Partners
  • Private money
  • Some hard money in the past
  • Today, mostly partners and conservative financing
  • May syndicate for larger deals

Advice for 50plusers Looking at Real Estate Investing to Help Them in Their Retirement

• Start with your goal in mind first and work backward
• For example:
  • To get $5,000 in income a year ($60K annually)
  • Buy n’ Hold real estate
  • Look at your area and see what a return might be
  • Talk to other investors in the area – let’s say they get 10% returns
  • Multiply $60K by 10% and you’ll get $6,000
  • You’ll need to buy $600,000 in properties to get $5,000 per month or $60,000 annually
  • How to get the $600,000? Flipping?
• Understand how things work at a fundamental level:
  • Financing
  • Buying and selling
  • Negotiation
  • Once you understand these things, it allows you to do other things within real estate when you need to

What’s Ahead for J’s Business

• Doesn’t want to keep flipping houses at some point
• He’s very market driven – tries to keep his options open
• It’s good to have a plan but don’t be so tied to it that you can’t be flexible when you need to be flexible

Rap-It-Up

• Favorite real estate book: The Book on Rental Property Investing by Brandon Turner and The Book on Managing Rental Properties by Brandon and Heather Turner
• Favorite business book: The Goal by Eliyahu Goldratt
• Most valuable web site for success: BiggerPockets.com
• Favorite app: Mile IQ
• Favorite quote: “It’s not necessary to do extraordinary things to get extraordinary results.” – Warren Buffet
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business? He would take the $1,000 and spend it on other people that could help him get re-started.

Books by J. Scott

• The Book on Flipping Houses
• The Book on Estimating Rehab Costs
• The Book on Negotiating Real Estate
• An Introduction to Real Estate Investment Deal Analysis

How Can Reach You Reach J. Scott

• 123flip.com
• j@123flip.com

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