What's going on, everybody? It's Matt Faircloth. Welcome, welcome, welcome to today's live
session.
Now, you guys have probably been watching the Mentorship Monday program we've been doing
here on the DeRosa group page for years. We have several hundred Mentorship Monday episodes,
and we decided that we've gotten a lot of inquiries from people, and we want to help
more people, and we want to do it in a live fashion that people can contribute to, and
be a part of, and everything like that. And it's just cool to hear people ask questions
live because there's followup questions, and there's just conversation. I'm used to responding
one way to you guys' email questions is one thing, and it's been phenomenal, and I thank
you guys that have sent in questions to help me at derosagroup.com.
Let's bring in our first guest, Justin? Who we got?
All right. We have Jason Martins. Jason, welcome, man. Can we hear you?
Jason, welcome, man. Thanks.
Hey, how are you guys doing?
We're great.
What's going on, Jason?
My question relates to mortgages. It's about rental property, and whether or not to hold
a property with a mortgage, or to not have a mortgage. There's two different ways to
look at it, but if I buy a property with all cash, right? No lends, I pay cash. I rehab
the property in cash, so now I've got the whole property with no debt on it, and I've
paid for the rehab. It's rented. It's getting top of the market rent. Should I refinance
that property and take that money back out so I can do another deal, or do I leave it
debt-free and maximize my monthly cashflow? Because that's where the issue comes in is,
okay, do I refinance, pull my money back out so I can do another deal, but then my monthly
cashflow is less because now I've got debt to service. Or do I maximize it, but I can
do fewer deals if I got all my cash tied up in property.
Yeah, you've got your money back out. Right, right, right.
What do you think about that?
Well, okay. So there is a relationship between borrowing money. You could get over-leveraged
on property, and people don't correlate these two, but it's true. Debt and risk are directly
correlated, right? So you're thinking like, hey, man, I could go all cash, pretty much
zero risk. And the only reason why anybody would ever go all cash on a deal is to avoid
risk.
The thing is is that there is a happy medium. Some people say, "Well, I just want to go
no money down, and lever the whole thing all the way up, and go borrow hard money to buy
it and hard money to renovate it, and everything like that." That's like the higher risk option,
because there's a lot of things that could happen to the market. It would pull you down.
So you'd buy the property for a hundred, you put 30 into it, borrowing all hundred and
30 grand, which a lot of people do that.
We haven't gotten into your goals or anything like that, and where you want to go, but I
do believe that if it were me, I would borrow a reasonable amount of money to buy the property
and renovate it and, and all that. Even if I had the cash, I wouldn't go all cash in
that scenario simply because, A, I want to put my cash at risk. Your lender kind of becomes
your partner on the deal, because they're on the hook with you, right? They got 50 grand
in and you got 50 grand in, whatever it is. And you're probably be able to negotiate cheap
enough money that it might make sense to borrow some money on the acquisition or on the rehab.
Now, you could easily talk me out of that because you're probably going to have to pay
higher interest rates. But, by all means, once you're done that work, whether you do
it all with your cash or with some debt blended in, you absolutely should refinance it. And
the reason on that is money is so cheap right now.
Right. But I can scale and buy more property if I refi.
I'd like to challenge you, Jason, to-
Justin's going to the same place I was going to go, but go ahead.
Run the numbers on that, because I bet that if you actually write it down using an Excel
sheet or the BiggerPockets calculator, you're limiting yourself, right? Even if you took
half the money, right? Take half of that money out, do 50% leverage on that property. What
could you do with the other half of that money? You could put it into the next property. You
will find more times than not that the cashflow from the two properties, even though you have
mortgages on them, is going to greatly outpace the cashflow from the one property that's
fully paid off. Because you're using leverage.
As a business owner, debt is good. As a homeowner, debt is bad, right? Kiyosaki says that, right?
There's good debt, bad debt. The debt on your rental property is good debt. The debt on
your home is bad debt. So, yes, no debt on your home, no debt on your car, no debt on
all that kind of stuff. No credit card debt, all that jazz. But it's okay to have business
debt because business debt is going to allow you to lever up and do more deals.
Yeah, absolutely.
Off to a great start, Matt.
My question is more centered around the private investors that we use. How can I offer security
to multiple private investors on the same project? And is it possible to have more than
one person on a single mortgage filed against the property, or is it possible to, say, file
multiple mortgages from individual private lenders on a single property?
Are you looking to do all debt, or you giving anybody upside? Are you borrowing all the
money from investors?
So, right now, we just started investing last summer, so we haven't even been doing it a
year yet. We're on project four right now. So right now, we're sticking with the short
term notes just to try to help us grow our portfolio. But we're starting to get some
interest from a few higher level investors that want to throw some more money at it.
So we will consider doing equity in the future, but right now it's more just for the short
term projects, especially on flips and stuff like that. If we want to obviously offer them
some higher level of security, like an actual mortgage up against the property, how can
we do that for multiple? We've had some investors express interest in that level. I've tried
like personal guarantees, too, because some of them are a little less value wise, but-
First of all-
... no ... Go ahead. Sorry.
A few things. If you guys aren't willing to personally guarantee your loans, then something's
wrong, right? If you're not willing to put your own livelihood ... I've had people like,
oh, we'll ... And, again, Justin and I do some big, big deals, like $7-$8 million deals
and stuff like that. It might make you not sleep at night too well if you've got a personal
guarantee out there, but you got to be able to do whatever it takes. And so I would question
somebody not willing to personal guarantee alone with an investor because, at the end
of the day, you're like, well, you got to put your livelihood on the line, put your
money where your mouth is, right? That's number one.
Now, because you're not looking to give these folks equity, and you're keeping it simple
because in the book I talk about how to structure equity, but equity is like even next level,
right? So you could do that. You can do it with JV. That's not what we're talking about
today, but that's there and that's possible.
Now, what is easy to do with what you're talking about is to give each lender a lien on the
property. So you have a first position lien, second position lien, third position lien,
fourth position lien. And as long as the property is going to be worth this, and the loans add
up to way less than this, than the future value, then they're protected through their
collateral that you're giving them. Right? So let's just say the property is worth $500,000
when it's done, and there's three lenders, and they get a hundred thousand dollar lien
a piece. So it totals up to $300,000. The property is worth $500,000. They're covered.
Maybe you can do what's called cross collateralization. So if you own a property over here that ... You're
buying property A. You're going to renovate it, but you already own property B, giving
them a mortgage on property A that you're buying, but also a backup mortgage called
cross collateralizing it with another property that has a little bit of equity in it, too.
Right?
Now, you do not want to compartmentalize all your lenders into one loan, because what you'd
have to do there is put all your lenders into one LLC, and that LLC would then have to loan
you the money. You just said a syndication, right? That's a syndication that has to get
filed with the SEC. That's a big bucket full of legal fees and everything like that, and
there's no reason to do that if you're just borrowing money in debt. Right? And that.
So I don't see why you would just do it that way. Give them first, second, third. They
might get skittish about the last positions, but you've just got to turn that around and
just say, "Listen, I'm giving you guys plenty of collateral in the property in the deal
we're doing. And I'm going to give you liens on other places if you want it, and I'm also
going to give you a personal guarantee."
You've been doing this for long enough and you get debt leverage, so can try this on
the next deal that you do. Let's just say a scenario you just gave me you come up on
again. $65,000 to buy, $25,000 to rent out, right? Now, I am assuming that carrying costs
are in those numbers. And if they're not, that's okay. But things like insurance, the
monthly payments you've got to pay them, to kind of factor that into your loan [crosstalk
00:08:43]-
... like a temporary cushion on the rehab, too.
Project costs. Okay? Right. So $65,000 buy price. Go to one person to borrow $30,000,
the next person borrow $35,0000. Okay? That's your first and your second position lien.
Okay. Take that, put it over here. Then you've got a third position lien that they're going
to loan you $25,000, but they're not going to give it to you at closing. The reason why
they're not going to do that is, number one, it gives them more collateral because they
have a mortgage on your property, and they didn't give you the money yet. Right? They're
holding that money. You're going to take your cash, and you're going to go and do $10,000
worth of work. You're either going to prove it to them in person and have them walk the
property so you can show them what you did, okay, and say, "Look, I did the plumbing.
I did the demo. I did this, I did that." Or you going to take your handy dandy cell phone,
and you're going to shoot a video for them and send it to them.
By the way, that is how my YouTube channel got started is was I started shooting videos
for people. They'll be like, "Hey, look, here's the kitchen. Here's this, here's that. This
is where your money is." And I sent it over to them, and then people started commenting
on the video.
But, anyway, prove to them the work that you did. You advanced $10,000 worth of work out
of your own pocket, then they advance you $10,000 for the work that you've already done.
So their collateral is there. You technically added $10,000 worth of value. They give you
that loan to re-compensate you for the work you've done. You go to lay out another $10,000
or $15,000 out of your own pocket. And then the property gets renovated, and they have
very little risk. Okay. It's called construction draws. I talk about it in the book, but that
is how you structure it, exactly what I just said right there. Okay?
[crosstalk 00:10:15] the cost and have the investor fill in on the backend.
You front it, then they fill you back. You front it, and they fill you back. Almost every
bank that lends on construction does it that way.
Practice beforehand the pros and cons, and try to anticipate what they're going to be
concerned about, and have those answers ready, and be ready to explain them on that. And
it's not even going to be an issue for them.
Basically, the question that I had is I'm a realtor here in New Jersey with EXP Realty,
and with COVID-19, a lot of things are changing right now. So my question was what steps would
you recommend that a new less-than-six-months realtor take to grow during these challenging
times, given that the new realtor may not have a brand or a client base or the experience?
Play into the change, okay? Be the guy that's doing the virtual showings. Be the guy that's
doing the virtual tours. I'll let Justin tell you a bit about it because he was the mastermind
of this one, but Justin designed a system that has our occupancy rate at all of our
apartment buildings have all gone way up during COVID. And Justin came up with a way to do
that. Because you're so new to the market, you don't have this way that you're used to
doing things that's over here, and now you got to change your model and do it differently.
You can reboot yourself and invent a Malcolm Tears that was always designed to work during
COVID, right? People want hands-off showings. People want to not have to get in their car,
and go out to a property to either lease it or look at it.
Right now, I have actually 14 buyers that I'm working with. Some are investors. So I
actually have a three people from Brooklyn that are down to Mercer County trying to buy
property.
Great.
Here's your idea. And this is a freebie from Matt. I'm going to make you a millionaire
right here, right? Okay.
Get your buyer's criteria set from your Brooklyn people, okay? From all your people, not your
Brooklyn people. Maybe make them fill out a Google doc or something like that on what
their buying criteria are. Get really, really deep down. Cash flow, how many resources,
how many units. Are you bankable, and get them to prove it to you. Show me you're bankable.
Show me-
Yeah, they have.
Right. Okay, cool. Get their buying criteria flat, and then go find a couple of properties
that meet your buying criteria, and call the showing agent, and say, "Listen, I got these
guys come in from out of town, and I want you guys to sign off and give me the right
to do a video shoot at your property," because it's not your property. The seller has to
sign it and say, "Yes, I acknowledge that Malcolm Tears can go and do a video shoot
at my property."
Then, once it's signed, it's just super basic, right? For right now, you might not want to
put it out live to the whole world, right? Because it's the showing agent's listing,
but for now, don't want to do that. But, eventually, you work that into where you start broadcasting
other people's properties on your cell phone, to your Facebook followers, and your YouTube
followers, or anything like that just like we're doing here on StreamYard, right?
But for now, just go and record a live session, or just a Google hangout, or whatever, and
give your investors a tour of the property without them having to get in the car and
drive all the way down here to go look at a property. Show it to them. "Hey, here's
this duplex. I love it. Here's what I like about it, and here's what I don't like about
it," because it's not your listing, so you can be a little more straight with them, you
know? Money to fix that roof. Not sure if that tenant paid the rent. Everything like
that, you know? You could be their eyes and ears, and the more you can do that using today's
tech, the more you're going to make it sail.
It's interesting you say that because one of my fellow EXP agents up in Canada, he did
that with a lot of success. So there's kind of like a little gray area, but you got to
get that. I didn't know how to get around it. And I think just getting that signature
from-
Sign a piece of paper.
... the listing agent is how you get around it. Yeah.
Make it crazy easy. Send it to them using DocuSign, and it's like a three sentence thing
that just says, "Hey, listen, I'm going to shoot this video. For right now, I'm going
to send it to my people. The video becomes my content, but I'm not going to send it to
anybody else aside from anybody that wants to buy a property for me."
Bottom line: play into the COVID thing. Find out what people want and how the world has
changed, because what I find is that there's a lot of people that are slow to react right
now because of COVID that are just-
Exactly.
They think the world's going to go back to the way that it was next week. It's not. We
might go back to work, but things are not going to go back to normal anytime soon. So
you got to discover the new normal and play into it.
Hey, Justin, you want to add to it?
Yeah. Listen, if I'm selling my house, my personal house here, I don't want people tramping
through with dirt on their shoes, and sneezing in my house, and like who knows, right? That
is a very real thing that I might be concerned about for 12 months or more, right? So how
do you use tech to ease my concerns as a seller about people coming in? And same thing as
a buyer, right? If I'm a buyer, do I want to walk through a dozen different houses,
touching the door handles, and this and that?
So leaning into it, embracing the tack, like Matt's saying, you can get pretty far along.
We're leasing all of our units without people even walking through the houses because our
leasing agents use our phones and take some really, really great videos. You could do
360 videos using your phone. You can do live walkthroughs. You can do pre-made video walkthroughs.
You can take a handful of photos, create a slideshow that's got all the selling features
on it. Put some nice, upbeat music behind it using free apps, right? And now you've
got an awesome marketing piece that shows off this property. If it's a rental, investment
property, put the highlights. It's going to rent for this. Your profit is going to be
that. This cap rate, whatever. Turn it into a little video. Put some dollars behind it
on Facebook.
To the people you're walking through either their home or their tenants' unit or something
like that, wear a mask, wear gloves, wear booties on your feet.
Your value, the way you're different to that seller is you're going to do one walkthrough,
and that walkthrough is going to get in front of five buyers or three buyers.
They're going to remember you.
You don't have to be bringing people through. You just got to go through once, you're respectful,
and now you got the information you need to give it out to everyone else.
Justin, final thoughts. Take us home.
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So that's what we got guys. Monday, 4:00 PM Eastern Standard time, be here or be square.
We will be here next week with more Mentorship Monday Live, and we hope to be answering your
question. Thanks for watching, guys. Have a great and profitable week.
Have a great and profitable week.