Investing WITHOUT Burning Out and What We’d Do With $1M

David:
This is the BiggerPockets Podcast, show 902. What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Joined today by my buddy, Rob Abasolo, and guess what? If you’re watching on YouTube, do you see it? There’s a green light behind me and that could only mean one thing.
We’re at a green light, just kidding. This is a Seeing Greene episode where Rob and I are going to take questions from you, the BiggerPockets community, and do our best to answer them. Boy, this is probably one of the better shows that we have ever done. A lot of good stuff comes out of today’s show.

Rob:
Yeah, a lot of really good scenarios here. We talked about if you’re getting started later in life in the real estate world, how much should you invest?
What niches should you choose? What’s going to be the most profitable? Is it too risky to get started at all?

David:
We’re going to be getting into scenario questions, different opportunities, people that have done well, people that have struggled. How we would either climb out of the hole that they’re in or capitalize on the advantages that they have. All that and more in today’s show. Rob and I are going to be covering what we would do with $1 million free and clear to invest.
When we would keep properties and when we would sell properties based off the profit of each option. Options for how to invest later in life and setting up future wealth for both you and your children, as well as how to grow a real estate business when it is super challenging. That’s going to be our first question. We’re going to be getting into that right now.
All right. Our first question comes from Josh, who is a former podcast guest on episode 749. James Dainard is here to help me tackle this and then you guys will be seeing Rob again very shortly. He’s just going to go grab himself a burrito bowl.

Rob:
I’ll be a right back.

David:
Remember, before we get to Josh, keep your questions coming. I can’t make the show if you don’t submit questions for me to answer. So head over to BiggerPockets.com/David, and give me the questions that you’ve always wanted to ask when you were listening to the podcast but never did.
All right. Up next, we have Dave Franco’s body double, also known as Josh Janus coming out of Ohio. He was previously a guest on the real estate podcast, episode 749. Josh, what’s on your mind today?

Josh:
I appreciate the opportunity. In my investment journey right now, I’m getting close to 100 units. I’ve been doing some flips. I do a good amount of transactions as a realtor and I’m trying to learn how to delegate properly. I had two really poor experiences with the contractors, kind of being my own property or project manager.
My question surrounds with as you’re scaling who or what responsibilities do you want to focus on delegating first regarding property management, project management, administration work, or even agents under you? Just that whole process from going from being the main operator in all of your businesses, to more of the manager of the businesses.

David:
God, I love it. You’re in that phase where you become incredibly good at what you do and said, “Hey, I’m going to scale.”
The whole thing becomes a flaming dumpster fire as you realize just how hard leverage is. James, speaking of flaming dumpster fires, how have you been able to handle these problems that all of us entrepreneurs are often sunk by?

James:
Handling might not be the right word. Dealing with it is probably the right word. Well, first Josh, 23 years old, you’ve accomplished a lot, man. I love to see it. I got in the business at your age, so you already got a jump on a lot of people, dude. That is awesome. It also means that you are a grinder and a hard worker and not everybody is cut that way, so you’re going to keep growing.
The hard part about that is if you’re getting to that many doors, that many transactions and doing this many flips at one time at your age, you’re cut differently. What’s hard is you’ve got to hire people that aren’t going to be cut of the same cloth as you. That’s going to be the reality, because I also am a person that puts my nose down and just gets to work. That’s okay, but you got to figure out how to scale and take those steps.
Over 18 years, we’ve grown eight different businesses in the Pacific Northwest and now we have almost 100 employees. We build homes, we flip homes, we run a brokerage, we lend money, we have property management, and it is a lot of work. The first thing is is it’s hiring the right people, not the cheap people. And finding people that are motivated and love what you do, not recruiting them, has been one of my other ways I’ve hired.
When people come to me and are asking for the opportunity and they really want themselves in the door, we make them earn it. To be honest, when we hire someone, we don’t pay them much on purpose. They go through the six to 12-month phase because when I got in this business, I made $0 for a year. It was up to me whether I wanted to stay in it or not, so I like setting the tone that way.
But as you try to scale, the first thing I would do is what is the most important part of your business that is bringing in the most amount of income? I would keep your focus on that when you’re at a younger age and you’re growing, because that is your cashflow that’s going to be coming in that’s going to help you grow. Also, write down what your skills are and what you do enjoy and what you don’t enjoy.
As a broker, do you enjoy providing services, working with clients and then bringing a team around that? Or are you more geared towards an investor that wants to rip apart houses, be in the middle of construction and manage those things? Those are two totally different businesses that usually require two different totally personalities. I would write down which one that you’re better at and that is more important.
Then look at how you can scale and free up time in those other businesses. If you’re really good at being a broker, you can start bringing in assistants working with you and it’s not as hard as a shift. Construction is a lot higher learning curve. Like you said, two contractors ripped you off, not enjoyable. It’s going to affect your other businesses too because it takes time and energy from you.
What I would say as you’re trying to scale, is bring in professional partners in those businesses, so they can help teach and grow you. And give up maybe part of the deal, because you’re bringing in the right partner so they’ll manage it for you. But if it’s vice versa and you want to be in the construction, focus on that and you can start hiring a small team beneath you.
Then systemize your leads and businesses through your brokerage. As I tried to scale my brokerage, it’s about hiring the right management, making sure they’re the right people, but it also came down to how organized is my lead flow in my systems. Because you can get after and grind and not be that organized, and still get a lot of deals done.
But to scale, it has to be organized, documented and that the team can plug and play, because if it’s not set up for them, they get stuck in the weeds and then you can’t grow.

David:
All right, Josh. Hearing all of this first off, it’s got to feel good to know that it’s not just you. You don’t suck as a human. This is every single person’s problem. Certain elements of business and real estate don’t get talked about as often because they’re just ugly and negative.
No one likes to be the one to come out and say how hard it is to deal with hiring. It’s much easier to talk about it like it’s fun, but it’s not, so it’s not just you. When you hear James’s advice, what type of objections are popping up into your mind? What specifics are you thinking about that we can help you with?

Josh:
For sure. I was on the podcast around a year ago and I’ve had a lot of people reach out since then, even locally. When they come in, I’m training people. I’m almost trying to make them become me and I’m not really focusing on what skill sets that they want to focus on.
I think a good thing for me and honestly, anybody else trying to scale that has people around them, is to focus on the individuals, like what they like. I’m also going to need to pay more attention as to what I enjoy, what I don’t enjoy. That was very helpful, James.

James:
No, and I think that’s great, Josh. One thing I would advise because I’ve learned that same lesson. As I have people come in that are interested, because you’re a salesperson, you’re going, “Hey, what do you want to do? How do you want to grow?” You want to shape it around it. Naturally as salespeople, we do that. I do the same thing.
I’m like, “I like this person. I want to find a spot for them. I want to find out what they’re passionate about and stick them there.” One thing I would say though that has hampered me in scaling is tailoring positions too much around the people I liked, rather than defining the role that I really needed first. And then going, “This is specifically what I want,” and then finding the person that fits that role.
It’s not putting that square peg in a round hole. Because they can be great people, but if they’re not really prepared for that job, it has definitely set me back because I used to only hire on people. I’m like, “They’re great. I’m going to make it work.” It would definitely blow up on me and then I just became inefficient. I’d have to restart my processes and restart the whole thing all over again.

David:
I got a couple pieces of advice to share with you when it comes to this very topic. The first dimension, if you imagine Mario from Mario Brothers running along the ground from left to right, okay? That is what I call learn. You start at one end of a spectrum where you suck, you’re at zero, and then you learn how to be good at something, that’s like 100.
Most of us are on this first spectrum, moving our way from left to right, trying to be good at what we do. You became good at flipping houses, you became good at being a realtor. When you got close to the end of that spectrum, you hit a wall. The only way to grow is to get into another dimension, which I call leverage. That’s like if Mario jumps, now you’re going up and down, okay?
The hard part about it, Josh, is you have to go from being close to 100 at learn to zero at leverage. You don’t know anything about how to do things through other people. You know how to get on the phone with the seller and get that deal locked up. You know the exit strategy, you know how to tell someone what needs to be done. You have zero idea how to make sure they do it or who to delegate it to.
Or how to prepare them for what’s being delegated, or how to manage all of these things going on. Because when something crosses your path, you just get it done. You’re good at learn. It takes a lot of humility to start all the way over and realize, “I have no skills in this second thing. I have to go to 100 down to zero.” Most people won’t do it.
If you do get good at leverage, you’ll be very successful, but the only way to grow from there is the third dimension, which is leadership. You got to start all the way over at zero again. You know how to run your teams, you know how to manage people, you know how to delegate. You have no freaking idea how to franchise something or scale it or inspire other people to be a you.
When you’re talking about your problems, I think what you’re describing is you’re trying to learn leverage and leadership at the same time. You know what to do, how to do things. You’ve hired contractors that you want to do the job, but you’re not good at managing them. You don’t know how they think. You don’t know how their business operates.
You don’t know how to communicate in a way that they’re going to take you serious. You’re trying to inspire them and inspire the people that come work with you, and hire these agents to work on your team. And keep all your clients happy and not run out of money as money’s flying out of your bank account, as projects are taking too long. You’re trying to learn two new dimensions at the same time, when one of them alone is super hard.
I would be asking myself if I was you, my ultimate vision is to scale to this point this vision that you have. How do you reign that back in and get good at leverage just within your flipping business? Just within your real estate agent business? But until you get to that point, you got to take it one step at a time.

Josh:
That’s very helpful.

David:
We’re going to be hearing a quick word from one of our show sponsors and then we’ll be right back.

Rob:
Welcome back to the BiggerPockets Real Estate Podcast. Let’s jump back in.

Josh:
Yeah. I’m going to choose one and see if I can delegate and pay attention. The two contractors that I hired in the past, I liked them and I don’t think I operated relationally in a way that was going to help them be successful and it created a storm.
I need to figure out more as to who can do this job, who enjoys this job, whether it seems to be the most comfortable thing for me to start with or not.

David:
You got to look at incentive. Maybe they got paid regardless of how they performed so they weren’t incentivized to do it well. You have to know what’s going on in their business. A lot of the time, I’ll find a bookkeeper that’s great. I’ll find a property manager that I love, and I’ll hire them to manage my short-term rentals. Then they get it and then they delegate it to their virtual assistant or their staff member that sucks.
That’s the person who’s looking at my properties, not the one that I talked to. I’m just looking at the P&L like, “Man, why is this so bad? That person’s so good at what they do.” I go talk to them and they jump back in, and they fix it and it goes great. Then three months later, it’s back to sucking again because they delegated it to someone else on their team that wasn’t good.
Until you’ve run the business yourself and understand these dynamics, you won’t know why things are going wrong, which is why entrepreneurship is so freaking difficult. James, anything you want to add on that topic, as you run several different businesses and you’ve dealt with these problems yourself?

James:
No. Sometimes there’s a lot of noise out there that you have to scale and grow and get bigger and bigger and bigger, and it’s just not true. Make sure when you’re scaling, that it’s going to be efficient on your time and your profitability and it’s worth it. Because I have grown businesses to where they’ve gotten really big, and I was like, “This is so unenjoyable.”
Even though we’re selling more, our name’s bigger, I’m like, “I would love to just take a step back, unwind this down,” because there’s a sweet spot in every business. I used to flip over 100 houses at a time in 2014, miserable. I was like, “Nope, not doing that anymore.” I used to grow the brokerage in the off-market company. We were trying to get as big as we could do as many deals we could.
It just became too big because it can become too big to manage in an efficient manner. Just as you’re scaling, really make sure that you’re being efficient and that you’re not stepping over a nickel to get a penny or whatever. Yeah, that’s the saying. Step over a nickel to get… Don’t waste profit because you’re just trying to get bigger.

David:
Dollars over dimes, I think it is.

David:
Dollars over dimes, that sounds way better. Yeah. Make the dollars, don’t go for the dimes.

Josh:
I like it. That was a really big topic in a short timeframe, so my brain’s going around.

David:
All right, good stuff. If you’ve ever felt crazy or like a failure, you’re not alone. Josh goes through it, I go through it, James goes through it. This is a normal thing to experience as a business owner and a real estate investor, so hang in there, it’s normal. If it’s painful, it gets better. All right. Thanks to everyone for submitting your questions to make it work in today’s market. Get those questions in at BiggerPockets.com/David so we can have you featured on a Seeing Greene episode.
We hope you’re enjoying the convo so far. Thanks for spending your time with us. We would love it if you would like, comment and subscribe to the show, and maybe even leave us a review where you listen to your podcasts at. Those help us a ton. All right. This next segment of the show is where we cover questions out of the BiggerPockets Forums, comments that we’ve received in the YouTube channel or podcast reviews that we’ve had from other listeners.
Our first comment comes out of the YouTube comment section. Get in the Space 7715 says, “I’m building a house this year in a tourist-trappy market. I’ll have the option of selling it two years after living in it and making a $500,000 profit tax-free by selling my primary residence. Or I could make 40K to 60K a season on short-term rentals. I’m thinking of building two houses and selling them to build a $1 million cash to invest.
“Then I’d switch to building rentals. If I build five smaller rental houses, they could cost $200,000 and be worth over $500,000 each, but they’ll bring in 40K a season from each place all debt-free. We’ll see how it goes. I think I could make more money faster by just building and selling, also has lower tax and legal liabilities. What would you do if this was you?” Rob, what are you thinking if you had these options?

Rob:
Well, I think first and foremost, is it safe to assume when he says that he can make 40 to 60 a season, that that’s net profit?

David:
I took it like that’s gross revenue that he’d be making and these are properties that don’t rent year round.

Rob:
I’ve gotten in this game where you build houses and you sell them and you make a profit. The thing is when you stop building houses, you stop making money, but it is a really, really good way to make money. I think that $500,000 is one of the most amazing runways that you could have to get started in the world of real estate. Most people get in this game and they say, “I don’t have any money.”
It’s a lot harder to give them advice, but this person has the opportunity to sell their property. Not pay any capital gains because they’ve been living in it for two years, or they can make $40,000 to $60,000 a season with short-term rentals. As much as I love short-term rentals, I don’t think $40,000 to $60,000 is really all that much money that they could reinvest into their portfolio.
But $500,000 is a lot, so I would probably go that route, but I would ask myself, “What can I do with that $500,000 to make the most money possible?” Right now, it looks like they’re thinking about building a couple of houses, and then selling them to build $1 million cash and invest. They’ve already got a pretty good method to do this. I would say if someone’s walking into real estate and they say, “Hey, I want to make $1 million. How do I do that?”
I’d be like, “I don’t know. It’s not easy. You have to have a lot of money.” But they’re coming in with $500,000 and so because of that, I actually think the $1 million blueprint is there. I would probably crank out a couple of houses just to build up my cash reserves, but then figure out how to deploy that into actual cashflowing assets that don’t require you to build a house.

David:
Yeah, that’s a great point. The question here is, is it better to build and sell or build and keep? If he builds and sells, he believes that he can make a million bucks off the first two properties. Then he could go build five smaller houses where he could make $300,000 off each of them. He thinks he’s going to make $1 million and then $1.5 million off of seven homes.
Just based on my experience, I think that this is wildly unlikely that there’s actually that much profit, but it’s possible if this person knows how to build and has some special in. There’s not enough supply there and everything lines up perfectly, I suppose that could happen. $1.5 million can buy you cashflow pretty much anywhere.
I don’t see any reason why you would need to keep these properties if you’re trying to get cashflow, because you could just turn equity into cashflow if you have enough of it. You could buy anything and it’s going to make a lot of money if you have enough cash. It’s going to be much harder to find a way to get 1.5 million bucks than it’s going to be to find properties that could bring in $40,000 to $60,000 if they were owned debt-free.
I see we were going there, Rob, but I agree. You should build, sell, take that equity, put it into more properties, but I would not be surprised if you don’t make anything close to as much money as you’re thinking on these.

Rob:
Yeah. I like the idea or the concept in real estate of build one, keep one, build one, keep one. You can’t do that at the beginning because you’re so focused on building up cash to keep building.
I would say, yeah, let’s try to build a couple, sell them. But as long as you promise me that that money will eventually be used to buy properties that can actually build you wealth and not make you temporarily rich.

David:
That’s a great point. I’ve said this a lot. People get stuck in start by building cashflow and let the cashflow make you wealthy, it’s incredibly hard to do. If you start by building equity, you can later convert it into cashflow and it will happen a lot faster. If you have that opportunity, take advantage.
All right. Up next, we have an Apple review from 1981 South Bay who says, “I love the Seeing Greene episodes and it’s a great addition having Rob in this series. My wife and I have been listening to BiggerPockets for two years. We finally just bought our first two duplexes and are planning to acquire more properties.
“We could not have done it without this podcast and the community. Thank you, David, Rob and the entire BP community.” Rob, how do you feel in getting a special shout-out?

Rob:
Hear, hear. Wow, it’s really nice because every time I do the Seeing Greenes, all the questions are like, “Hey, David, thanks for all you do. Here’s my question. We appreciate you, David.”
I’m like, “Listen, I appreciate you too, but I’m standing right here, Carl.” So it’s nice to be acknowledged in the reviews.

David:
Awesome. Thanks for everybody for showing some love to Rob on my show. I love hearing this and we love you as well, and we appreciate the engagement. Please continue to like, comment and subscribe on YouTube, as well as giving us a five-star review wherever you listen to your podcasts at. That would help us a ton.
Right after this quick break, we’re going to be getting into sitting on $1 million in equity but not being sure what to do with it, and restarting later in life while using the proceeds from a profitable business exit. What strategies may work, what may not, so stick around. We’re going to get into that. All right. Our next question comes from Jason.

Jason:
Hey, David. My name is Jason Baker from DeLeon Springs, Florida near Daytona Beach and my question is this. We’re sitting on over $1 million in equity between our primary residence and we own two single-family residences that are currently rentals. They’re free and clear. My question is, what would you do in this scenario?
What’s my best path forward to build long-term wealth and just passive income for the future generations as well? Would it be best to just buy a bunch of DSCR properties or fix and flip? I have construction experience, as well as contacts with contractors in the area. I could self-fund. What would you do in my scenario? Thanks a lot, man. Appreciate it.

David:
All right, Jason, what an awesome question and what a great dilemma to find yourself in. I’m going to start by maybe laying a little bit of groundwork.
Then turn it over to Rob and then jump back in, so a few things here. You mentioned build passive income, but then you mentioned a bunch of active activities.

Rob:
Right. Like flipping, I was like, “Oh, I’m sorry, man.”

David:
Yeah. I think when you said passive income, what you meant was cashflow so let’s maybe clarify that. Then you also mentioned that you are looking to build generational wealth.
You did a great job of explaining to Rob and I where you have an advantage and skills, which should be in construction, subs and the ability to self-fund.
Everyone, this is a perfect example of the best question to submit on Seeing Greene because you gave us all the pieces we need to give you a really good plan. All right, Rob, what are you thinking?

Rob:
Yeah, so I was going to say the same thing. Flipping is perhaps the least passive aspect or niche in real estate, but he sounded like he was down to do it and that’s good. For that reason, I’m actually pretty happy to hear that he’s got contacts, he’s got contractors that he’s worked with. He said the most important aspect of this, which is self-fund.
Meaning he’s got the capital to actually do a flip or two and build up some capital, so I would say let’s go that route. If you’ve got the experience to do some flips, if you’ve got the money to do some flips, and you’ve got the contacts to actually execute all of them, then it seems like the stars aligning here for him, I think.

David:
Yes. I’m going to answer the question because it’s a great one, but before I do, I want to answer a question that he isn’t asking but everybody should hear. There is a, I don’t want to call it a lie, but maybe a misunderstanding that happens in the world of real estate investing, that passive anything is possible. I bit into this apple, the apple if you will, and took a big bite of it, and had to learn the hard way that it is not true.
I started businesses, I bought real estate, and I heard from a lot of the people that were mentors to me, that you need to build passive income. I interpreted it to mean I don’t pay attention to it. I bought it and I set it and I forget it, and it falls apart. There is no passive fitness. You can’t get in shape one time and stay in shape. There is no passive relationship success that you make your girl fall in love with you and she just stays there.
There’s no passive parenting where you raise your kid for 10 years and then they got it. You will always be doing these things and business is the same thing. There is passiver investive and passiver investing and passiver fitness. Once you hit that point where you’re fit, it is easier to stay there than it was to get there. Once you’ve got a business down, you can delegate things.
People build experience, they build knowledge, they can help you run it and it takes less of your energy, but it never goes away. Here’s what I’ve been telling people since I’ve had to learn this lesson the hard way. Don’t look for passive income, look for something that you love doing. Look for work that you like because you’re always going to be doing something, but it doesn’t have to be something that you hate, okay?
I like lifting weights. That’s one of the ways that I like to stay in shape. I’m not a super big fan of other forms of fitness, so I avoid those. I’m not going to go to Pilates or I’m not going to do Prancercise, but somebody else might like that type of stuff. For you here, Jason, you’re mentioning that you’ve got a background in construction. You specifically mentioned people that can do the work.
That lets me know that you have relationships in place with people that you like and trust. That is a valuable asset. It is even more valuable or just as valuable as properties in your portfolio. You took years building these relationships and this knowledge and this skill set to know who you could trust. I’d love to see you use that to continue growing a nest egg. Keep building and flipping houses.
Keep doing work, keep running a construction company. Keep making income in something that you love, and then just keep putting that money into more properties. If you can keep doing that debt-free, man, that’s a great way to go about it to keep your risk very low and build generational wealth for your family. What do you think, Rob?

Rob:
I love it. I think he’s already built a little nest egg there. He’s already built a wealth over his life. He’s proven what he’s been able to do over the course of his life.
I don’t think he needs to take any unnecessary risk doing things in real estate that aren’t aligned with his skill set, which to me, I think seems to be more in the flipping/contracting side of things.

David:
There you go. I had another question that I wanted to ask you. He mentioned he owns property free and clear. I hear this all the time in the real estate space.
Free and clear comes up all the time, but you know what I’ve never asked myself? Free and clear of what? Have ever thought about that? Why do we say free and clear when we mean that there’s no mortgage?

Rob:
I would say it means free of any mortgage, clear of any liens, is my guess.

David:
That’s what I was thinking too. It’s literally I was like free of debt and clear of encumbrances or something.
But if you know the answer to that question, let us know in YouTube what you think free and clear actually means.

Rob:
Clear of anxieties, which doesn’t exist in real estate.

David:
Yeah, that’s the unicorn. That’s exactly right. You’ll never get that clear of anxiety property. Good stuff. Yeah, and I’ll just recap this. If you’ve got a skill that you’ve built, you’ve got a thing you like doing in real estate, adjust your workflow so that you can continue working, but do it in a way that you like. If you like your weekends off, if you like your nights off, just make less money but do something that you love.
If you like taking on certain types of projects but not others, just do those projects. When you’re nearing the end of your journey, you don’t have to be pedal to the metal like when you’re getting started, but you still want to be doing something. I love to see people that have built up skills in real estate, as well as assets that are paid off in real estate, continue to use those to help the next generation.
All right. Our last question comes from Sanjay Kumar who says, “I purchased a few foreclosure properties about 20 years ago. Around 10 years ago, I sold all of these investment properties to concentrate on my e-commerce business. I’m 59 now and I’m in the process of diluting my businesses, which I currently own, and would be receiving around $500,000 every year for the next 10 years.”
Sounds like he’s going to be selling on terms. “Based on the current interest rates and my age, please advise me on the right approach. I’m a US citizen, but I currently live in India so I’ll be an out-of-state investor. I’m looking into Columbus, Ohio at Lehigh Valley, Pennsylvania where I can still breakeven or get close to it in good neighborhoods.
“The population and job growth in these areas have been going up for the last few years and there’s a lot of demand for rentals. My sons live in the US and so I would like to build my wealth there, and I’ll be traveling to the US four to five times a year. I’m in great health. I want to get back to investing for long-term rentals, primarily to create wealth for the rest of my family.
“I don’t need immediate cashflow from each of these purchases, but at the same time, I don’t want to be too negative in each of the properties I buy. Any advice would be greatly appreciated and thanks again for sharing your knowledge.”

Rob:
Lots of interesting things on this one because they’re obviously pretty close on the retirement side of things. The last thing I’d want them to do is buy a breakeven in hopes that it appreciates and eventually cashflows. But on the flip side, they did say that they’re doing this to create wealth for his family.
If the idea is, “Hey, I don’t need to make money, I just want to create a nest egg for future generations,” I think this is fine. But I would say, I don’t know, I think I would lean more towards derisking as much as possible, maybe looking at a really, really, really passive syndication or something.

David:
I was a little confused when Sanjay mentioned buying in areas where they might not cashflow when he’s going to be making $500,000 a year, as well as the money that he’s already got.

Rob:
Yeah. I’m just like, “Yeah, why?” Getting into real estate when you’re so set up now and just like at the end of your career.
I’m like listen, I love it, but I do wonder if there’s better places to make a return.

David:
Yeah. Cashflow tends to be where people start because there’s several reasons. One, they don’t have a lot of money, so they want more of it. When I say money, I mean capital in the bank.
Because equity in a property is a luxury that you can only really value if you already have cash in the bank. You can’t buy Chipotle burritos with equity. Rob, you know that better than anybody. Can’t get that double chicken if you don’t have cash in the bank, right?

Rob:
Not yet.

David:
Second, cashflow will reduce risk on properties, but it’s not as good as having it completely paid off. That’s the best way to be reducing risk on properties. Now, here’s the downside to cashflow that’s not talked about. It’s not a hard and fast rule, but generally speaking, you have to go into lower and lower price points to make traditional real estate work if you want it to cashflow, which means you often end up in the worst neighborhoods.
Which is okay when you’re getting started and you’re trying to figure out this whole thing because you can get in, then you can get out again. It’s definitely not something you want to be dealing with when you’re 59 years old, and you’ve already crushed it in business and sold your e-commerce things. I would prefer to see Sanjay put his money somewhere where it’s going to appreciate over time, but more importantly, there’s not a headache factor.
I want Grade A real estate. I want the best tenants, I want the best opportunities, I want the safest investment. I want the least volatility and the least amount of risk, which is the opposite of most cashflow real estate. Now, there’s a couple of things that jump in mind. He could buy a short-term rental and pay cash for it. You can get yourself a nice little cashflowing property if there’s no debt on it with $500,000. Buy one of those every year for the next 10 years, you’re going to be set.
That’s also going to provide more generational wealth for your family because they’re owning real estate in the best areas. Now, if you’re trying to invest $500,000 in some of these other areas, you’re going to be putting say like 20% down on a $200,000, $300,000 property. That’s going to be like $40,000 to $60,000, so now you’re going to have to buy eight to 10 of those things every single year. After 10 years, you’re going to be left with 80 to 100 properties that are not super strong cashflowing and a big headache.
It’s going to be like herding cats. I’ve been there before where I had a buttload, that’s a technical term, Rob, of residential properties that were all just traditional real estate. It was every single day that a new problem was coming my way because something had to be fixed. I eventually sold that portfolio and reinvested that money to where I went from 50 or 60 single-family homes, into 12 luxury, short-term rentals. What do you know, a lot of my problems went away? What are you thinking?

Rob:
The other one little thing that he said is that his son lives in the US, and that they’re going to be traveling to the US four to five times a year themselves. I might maybe start to empower, if the whole idea here is creating wealth for the family, then I think maybe we need to start empowering the family to do some of the work here. Maybe training the younger generation to manage this for them.
Because what I don’t want is for Sanjay to be reaching retirement, but having to deal with the nonpassive aspect of real estate. Because I think if you put too much money, $500,000, that’s a lot of money. I’m not saying they’re going to deploy all of that into real estate. But if they deploy a significant amount of it into real estate, they are creating some work for themselves that I just want to make sure that they’re ready for.
My biggest advice to Sanjay is scale accordingly. Just because you have $500,000 a year does not mean you should invest $500,000 a year right out the gate.

David:
That is great, great counsel, Rob. Well done. BiggerPockets Podcast is different than other podcasts where we’re actually going to shoot straight with you. A lot of real estate influencers and people that talk about real estate, they just tell you about the end result. Here’s the cashflow, here’s the money, and you know what? They only share the stuff that went well.
You don’t have a lot of people out there saying, “Here’s where I took it in the shorts and it went terrible.” It gives this impression that every investment is always a great investment and it works out well, which is not the case. When we’re listening to this question, Rob and I are thinking about all the headaches that are going to come from buying those types of properties.
When you could just go buy great properties, primo stuff, great locations, great appreciation, great rent increases. If you get good management, like if it’s a short-term rental, you could do largely for the most part, pretty passive. It also gives your children an opportunity to get into real estate because they can learn how to actually do the work. They can help manage the short-term rental.
You can have them out there cleaning the property or learning how to market it better or learning guest communication, and you can see which of them have a propensity to get into that space. That’s a great opportunity as you’re teaching them how to fish, rather than just handing them a bunch of fish. Because we all know when you hand your kids a bunch of money or a bunch of fish, it can get smelly if they don’t know what to do with it.
Lastly, I will say this. If you take my advice and you buy one $500,000 short-term rental every year and just pay cash for it and you decide you don’t want to be in that space, or for whatever reason you don’t love it and you have 10 of those things. You’ve got $5 million of real estate plus whatever appreciation that you’ve accumulated over that time to sell and put into something like commercial properties, multifamily, residential properties, triple net properties.
Something that might be better suited. Whereas if you buy a whole bunch of residential properties, it’s a pain in the butt to try to sell a bunch of $200,000, $300,000 houses. You have to try to sell them all at the same time to get a 1031 going on to move that money into the same property. Much more difficult than if you bought a bunch of short-term rentals, and you could either sell less houses to move into something else or refinance them and use that money to buy bigger properties.
There you go, Sanjay. You are set up. Thank you for asking this question and good luck. I got my fingers crossed for you, and let me just say congratulations on what you did in the e-commerce business and your success there. Heck, yeah.

Rob:
Yeah, it’s amazing.

David:
All right, everybody. Thank you all for your engagement. Remember to head over to BiggerPockets.com/David to submit your question. If you’d like to reach out to Rob or I, pick our brain, pick our nose, pick whatever you want.
You can find our information in the show notes, so please go check us out there. This is David Greene for Rob the tag along Abasolo, signing out.