Jim: Hello Angelique.

Angelique: Hello.

Jim: How are you?

Angelique: Good. Thank you for staying up so late for us.

Jim: No problem. I'm about to… when this is done I'm going to watch another episode of some TV show on Netflix. I'll find something.

Angelique: All right.

Jim: I'm a night owl.

Angelique: Okay. Okay. Good. Good. So Mike and you have a lot in common. He loves lease options too.

Jim: I thought you were going to say because I shaved my beard about five years ago.

Mike: How's it going? Hey Angelique. Hey Jim. How are you doing?

Jim: Hey Mike. Good.

Mike: Fantastic.

Jim: So how are things over there in Washington State?

Mike: We're making good, we're doing all right.

Jim: Well, you got a couple of companies there that are doing well in that state, right, um, Microsoft and Amazon.

Mike: And Amazon. Yeah. They seem to be doing really, really well.

Jim: How close is Puget? How do you pronounce it, Puget Sound?

Mike: Yeah, Puget Sound. So I live on Bainbridge Island. And so, it's about 200 a yard to my west over here’s Puget Sound. So I don't have a view, unfortunately. But we're right by the Sound.

Jim: How close are you to Seattle?

Mike: A half-hour at the fairy.

Jim: Good, good.

Mike: I take the car on the boat be there in a half-hour. So it's not so bad.

Jim: So the advantages of the big city and the conveniences of the simple life.

Mike: That's right, exactly. Now, where are you from?

Jim: I'm up in Ottawa, Canada.

Mike: All right.

Jim: Actually, I don't know if it's up you're probably higher than I am and if you go.

Mike: Yeah. We're pretty close to the border. Yeah.

Jim: Yeah.

Mike: Fantastic. How are you doing Angelique?

Angelique: Good, good. We already have 20 people on, people are getting on quick today.

Mike: Wow, that's good. That's good. 

Jim: So you have a fairly good-sized membership?

Angelique: We have about 450 members. And we usually have about 35 to up to 135 sometimes people on these zoom calls.

Jim: Yeah, nice. Yeah, I was just looking because of the lockdown right? I said, well you know I can't get out and can talk to many people, so I had my assistant just start poking around to see if I could find some of these events to attend. And so, you guys were nice enough to invite me to have a conversation tonight. So thank you very much. Maybe share some of my history, some of my wisdom.

Angelique: You're welcome. When I saw the lease option on your history, I thought you and Mike would connect well, so that's why you got to meet with him.

Mike: I've done quite a few leases out. Well, I don't know quite a few. But it seemed like a lot… not as much lately because this is a lot more when the market dictated the need for lease options. So yeah, it was tougher to get a mortgage, we did a lot more of them, and we kept them more just as straight rentals and we flipped houses. It’s all very good.

Angelique: So Jim you want to fill us in on your background?

Jim: Give you an overview?

Angelique: Yes.

Jim: Yeah, okay. Let's see. I started real estate investing probably about 25 years ago. I was in a small town for this wedding. My niece was getting married. And I saw this ad said, live in one unit and rent out the other unit, right? So i went in between the reception or the wedding and the reception, I went and looked at this property just because I, I wanted to. And so, I went in and I talked to the guy and he was an investor and he was trying to get rid of the property, he said, “What you can do”, he says, “You can move in this”, for moving to this property. And then, the rent from the other half will help carry the property. And I said, “What if I wanted to rent out both sides?” So what we ended up doing, we ended up putting together a deal where, I was going to pay for the property over a period of time and it's a deferred agreement of purchase and sale, when I found out later it's all it was almost a lease option. So I didn't buy the property. He held the property on a mortgage for three years. And then, after three years, what I did is I used the rents from the property for the down payment to purchase a property. I think I put like a thousand dollars down on a credit card or something like that. So I did my first lease option without even knowing I was doing my lease option. At the end of that… he had a bunch of other properties. So at the end of the three years, I think I went and got a mortgage and purchased the property. And then, I did two or three more like that. So I was buying duplexes. And then, as everybody knows, if you're over-leveraged by the time you get into your fourth and fifth property, the banks don't want to talk to you anymore, right? So I got my brother involved. He was out of work. So I said, “Well, I heard about this thing called lease options”, okay? So what's that all about? So we started looking into it. And I said… oh and prior to that too, I remember with some of these purchases, I'd done another purchase. And I'm just trying to give all sorts of nice creative things that I want to bring up in this. So one of the things I did there was a duplex for sale and I got my niece who was new in real estate as well. I said, “Well, here I want you to go make this offer and get them to take back a mortgage.” Like this was her first deal to write. She said, “What do you mean?” I said, “Just ask for a vendor take back.” So I remember her coming back from the office, she's saying, “They agreed, they agreed.” So I ended up buying that property for nothing down. And this was back in the days where you, where you could right you, where you didn't really need to have any skin in the game. So then, I got into the lease options. And I remember it was kind of difficult because at first, I was trying to figure out how to position this, doing a bunch of marketing on Craigslist, Kijiji here in Canada, looking for somebody that had a property that would fit into this idea of a lease option. And because I couldn't get a mortgage, I wasn't really looking to purchase it. So what I wanted is I want the owner to hold the property, so in a sandwich lease option. And I don't know how much detail you want me to go into this stuff with explaining any of these types of scenarios or you can ask questions, or maybe if somebody has any questions. So what I did in my first lease option was actually a sandwich lease option, right? So I got the property. I released it from this person. And then I went out and found a tenant-buyer and put a person in there to rent it… I was in the middle, all right. I collected rents from the antenna buyer and then I used the rents to pay the property, and I structured that again that was a three-year deal. So at the end of three-year, I was going to buy the property or I was going to just assign it to the tenant-buyer. So I'm starting to market pretty aggressively. So I'm getting people interested. And what's happening at this point, I'm getting a lot of interest from accidents… or from motivated landlords, people who wanted to get into real estate who didn't have, what wasn't making a good go of it, right? They were finding that the whole thing about managing tenants wasn't fun. So I was getting all these, I guess, investors or landlords coming to me saying, “Hey, I've got this property, let's put it in your program.” And then what happens is, I'd get the property, and then I'd get another property from the same guy, repeat offenders. So for some of these guys, I was getting two or three properties, and I was renting them out to tenant buyers, and… Yeah. So that's how I grew my portfolio. So when I got into release options it was 2007 or eight. And then I grew my portfolio like within three years with my brother's help. We grew it to over 100,100 properties in three years.

Mike: Wow.

Jim: And then, the subprime crisis hit right? So I lost 30% on all properties across the board. And I was on the phone every day negotiating with sellers, negotiating with tenant buyers. So the scary part of this I think I lost about a million bucks in that about a six-month time frame there, not just on in value, but out of my pocket, because I was trying to keep some of these owners alive by paying my out of my pocket just a bad business decision in hindsight, right? So that's sort of where my whole lease option. I did lease options in and I kept doing these options in another city which was a more stable economy with less impact, because of the Subprime Ottawa, being the capital, it saw some fluctuations, but not as bad as this small town which was my hometown. Yeah. And so, I started doing some there. I've done a few development projects, small development, like six-unit townhomes, development projects. I've done a bunch of… I've owned rentals for a while. Now the funny thing is I don't own any properties. So I've graduated up through the starting in wholesaling, I guess, I've done and… I mean, we can get into some of these creative financing deals, because I think I've done just about everyone that you ever hear about… never purchased any property with my own money. I always brought in joint ventures or did seller financing or creative financing. And then, so now what I do is I spend most of my time raising money for other people's deals. I got most of my money into private equities doing some training. I started my own training program, now my training course. Yeah. I mean, once I hit 65, I said, “Okay, well, that's… I don't like dealing with tenants anymore either, right? And disgruntled the investors. So that's mostly what I'm doing now. So is that to give you a good framework here? 

Mike: Yeah, for sure. So you said your first deal started as a sandwich lease option.

Jim: Yeah.

Mike: And then, and that was a pretty good strategy. So you started doing quite a few of those or did you ever just start to close the deal yourself and then put a tenant-buyer in there?

Jim: Yeah. Eventually, but most of them like the first 50, I think I did was all sandwich lease options.

Mike: Wow.

Jim: And the way I did sandwich lease options, I did the standard whether where the owner holds a mortgage. So I shouldn't say sandwich lease options, I did a couple of subject tubes where I did take ownership of the property, right? And then, I've also done some double closings there which is always interesting, right? And I have the exit strategy on a lot of these things. It was pretty creative too. I mean, I don't know. Have you ever done sandwich lease options, Mike?

Mike: Yeah. I've done a few.

Jim: Yeah. The tricky thing there is when you go to close is where you do the assignment right because you've got two leases. So you can do two option agreements. So you can either assign your owner or the seller's agreement to the tenant or you can sign the tenant’s agreement to the owner. And so, I've tried it both ways. And there's a lot of paperwork because you've got to do all these options for these options to execute the option agreements. And I remember being in my lawyer's office, signing all these papers and just for double closing so it gets pretty onerous. Now what I ended up doing, later on, is I got out of the… I was still the middleman from a property management perspective. So this is interesting. I don't know if people do this. So what I did is I had all the agreements between the tenant-buyer and the seller. And then I had a property management agreement and an assignment agreement at closing. So the property management agreement said, every money I collected from the tenant I would give the owner some, but I would keep some for my management fee. So that's how I got my ongoing profit from being in a lease option. And then in closing, I always had a clause in there that when they closed I would get whatever profit I had built into as part of an assignment agreement.

Mike: So let me get that straight. Then so when you would close a sandwich lease option, you weren't collecting, you're collecting the payment forwarding into the owner, you're collecting the difference.

Jim: Yeah.

Mike: That sounds pretty normal. But then, in the end, you said that you would step out of the way instead of it being an A to B, B to C transaction? Or it would be an A to C transaction?

Jim: Yeah.

Mike: You would get paid a fee.

Jim: Yeah. Initially, I was doing a lot of A to B like I would do assignments of the agreements to one of the two parties, right? And they would execute on those agreements. So there was never any double close or any type of transaction where I was involved, or what I would do. I got smart because I didn't want to put all these agreements in place. I don't know if I could be smart… I'm sure there are some tax rules and some legal rules about this, but my lawyer like I had lots of lawyers working for me back then. But what I would do is just put the agreements in place. So I had the lease agreement between the owner and the tenant-buyer, and then I had the option agreement between the owner and the tenant-buyer. But in the option agreement, I had… at closing, you will pay color and realty, whatever the amount of money was as part of that assignment. And then the property management agreement is where I got my monthly profit. And then I also usually got to keep… because I used to get paid three ways, I got paid from the option amount. So when they came in and they put so much down, the tenant buyer gave us anywhere from $10,000 to $20,000. I would take a portion of that or all of that as my finder's fee, but I would lease the property from the owner for one dollar. So I was always making a good spread. The sellers that I was negotiating with, we're always very motivated sellers, right? And that's the key, right? When you're in real estate… or at least the way I was doing real estate, there were two things you were looking for all the time, motivated sellers and investors that are all you need to look for, right, because you don't want to get involved with properties. There are lots of properties out there that you can invest in, that isn't going to cash flow very well, that you're not going to make a lot of profit. Those are easy to find. What you want is you want to get properties from sellers that are very motivated, motivated for one of two reasons. The properties run down and they can't get rid of it, or motivated, because they are personally in a bad situation, unfortunately. I mean they call it what is a death, divorce, and debt, or the three Ds.

Mike: Right.

Jim: So somebody who's accumulated a lot of debt, somebody who's had a death in the family, who's either inherited the property or were co-owners of the property like a spouse and now they can't carry it anymore, right? Or that divorce, death, divorce, and what was the other one death, debt, right? Somebody in a lot of debt… yeah or went for a divorce, that was the other one, right? So I was always finding the most motivated seller, was a landlord, who tried to become an investor. And there are a couple of bad tenants coming in trashing their place and putting it out on the market, they said I don't want to deal with this anymore here Jim. I have my property, right? Literally, I had people coming into my office throwing their keys on the thing saying here, “What can you give me for this?”

Mike: What were you doing for marketing? How are you getting sellers to contact you? 

Jim: Again, I'm just thinking back in 2008, 9, 10, it was mostly online classifieds. So in your case, it would be Craigslist. In Canada, the equivalent is something called Kijiji. But I was just running a ton of ads. What was interesting too… that's to get tenant buyers. But now I find profound properties is I would… I'm an IT guy too, right? So I'm a bit of a geek. So what I did is I had an RSS Reader, if you're familiar with RSS. And what it would do is I would read the entire listing of all the ads on Kijiji or Craigslist. I can do Craigslist too using a tool called Inoreader. And so what it would do, it would show me the list of every property that got listed that day, and I had a VA that would go through that list and say, “Which one haven't I contacted yet?” right? So she'd take all those and put them in the spreadsheet for anything that I hadn't contacted, and we just sent an email out, saying, “Hey, would you be interested in selling your property, if I could make you some profit on?” Something like that, right? So invariably, I'd get one or two leads a day that we'd follow up with. And you know, within a week or two I'd have a deal that I could put together. But it's volumes and like it's hundreds of contact points to all of you. Literally, as I said, I was contacting every listing. Not every listing. What I meant was every new listing, right? Because you know, with Craigslist, people will post the same property over and over again, right? So what I would do is I post, I'd contact them the first time, the reason I had the Inoreader and the spreadsheet is I didn't want to keep spamming this person every day with the same offer, right? I'd maintain it in the spreadsheet, and then I'd do a follow-up every… maybe a couple of weeks I would offer them again. And then, what I would do is I would take all that and then I'd put it into a CRM, and then I'd just manage anybody who had some kind of interest, and then it would go into the next level of follow-ups, right? And the money's in the follow-up, right? 

Mike: That's right, yes, because it's a numbers game and a lot of people… I'd imagine what you're offering a creative solution and were you contacting people to have their house named for rent or for sale or for both?

Jim: Both. I mean that's the ideal situation. Initially, you find that…

Mike: You got better success with one or the other.

Jim: Yeah. Well, first of all, I was just offering everybody who put their house up for sale and everybody who put their house up for rent, okay? And then, what I would do is when I was looking at them, I would also look at the other listing to see if they were in both, because then you know, they're really motivated. And even though there are some times when people say, a very motivated seller, it doesn't really mean it's very motivating… and the other thing is with these tools you can exclude realtors. For example, you don't want to copy, you don't want to reach out to any of the realtors who are posting, because they're not willing to make deals, or at least that was my experience with this type of thing that they're always looking for… obviously, they're in business to make money, so they want their realtor fee. Whereas the deals I'm making with the sellers, I'm not paying them anything, right? I'm just taking over their property, putting a tenant in there, and then getting out of the way or… well at least, just managing it for the period of time.

Mike: Yeah. My personal experience when I was marketing a lot for on Craigslist and online people that are advertising their house for sale and for rent, it seemed to have more success with the folks that had their homes for rent than they had for sale.

Jim: Okay.

Mike: It was easier, my experience to get a seller who was considering renting the property to think about renting it to me.

Jim: Yeah.

Mike: And buy it on a future date, rather than somebody wanting to cash out and asking them to delay that. But obviously, you get both.

Jim: Yeah. And I think that's probably because you've also got landlords that are in the rental area, the disgruntled landlords, the unhappy landlord.

Mike: Yeah. They probably just got rid of a tenant or somebody that they weren't very happy with.

Jim: The other thing I've done which wasn't a good experience and I'll just add that is I've found tenant-buyers for some of these people, okay? So I've placed tenant-buyers in there, got my finder's fee, almost like a wholesaling, I call it the lease option wholesaling. So you get a tenant-buyer and then you just charge a fee for doing that. And what's happened… one time anyway, the tenant didn't… what didn't turn out to be very good, even though I gave them the option, I said, “Listen, I can manage this for you for three years or I can just find a tenant for you and I'll give it back to you. And you only have to pay me a finder's fee.” You know, the difference between, let's say a $30,000 or $40,000 profit over the three years that i would get, versus just a $10,000 finder fee for finding a tenant-buyer.

Mike: You see out of it?

Jim: Yeah. And what happened, the tenant-buyer didn't turn out very good. So they ended up taking me to court. And so, I and the realtor split the fees on the cost of doing business. I remember taking courses way back when on the old rich dad courses years ago or the Whitney courses if anybody's old enough to remember the Russ Whitney training.

Mike: Russ Whitney?

Jim: Yeah, yeah. And I remember the instructor saying, “If you're not being sued, you're not, your business isn't growing fast enough.” Right? So I've been there quite a few times. And my lawyer's… three thousand dollars, four thousand dollars, he says, you just got to pay attention, it's the cost of doing business, right?

Mike: Yeah. So, Jim, we have… do you have a couple of questions, uh…

Jim: Okay.

Mike: One, David asked, is all of your investing in Canada, which provinces and, are you familiar with some of the differences for above and below the border.

Jim: The kind of stuff I do… there's not a lot of differences. I guess, I mean I've talked to people. I've been on Biggerpockets. I've given a lot of advice there. I've coached some people too. I don't think the nuances of the lease option, the fundamentals of the lease options are the same. There are some variables per state, I understand, what is the Dodd-Frank's rule, right, where you have to be careful. And you know, as far… and also, there are some tax rules, but I've never really been concerned about all that. I just go to my lawyers and say, “Can I do it?” you know, go to my accountant and say, “Does this make sense from a tax perspective?” I let all the experts do it. That's like… people have asked me all the time whether the, what are the lessons I've learned right over my 25 years. And the number one thing I would say is trying to do some of this stuff by myself, thinking I could put out my own offers, think I could do my own marketing, think I could do my own legal research, I've built offers from scratch, I've made offers and in hindsight and learning from all this… now, when I was very active, I just went to my lawyers and my realtors, using the professionals to do the job, made a big difference, and that's what really helped me scale.

Mike: Right? And Brandon asked us. Is there any special insurance available when you're in a sandwich lease option? For that, but I thought maybe a few.

Jim: Insurance you mean, as far as renters insurance?

Mike: Brandon, you may want to clarify? But I was thinking it might have been in terms of like hazard insurance or something, which if you're in a lease option since you're not on title, the property you wouldn't be in responsible for the insurance policy that would still remain something that is the seller.

Jim: The owner?

Mike: And then, okay you said as if the tenant does damage, who is liable? That's maybe a question.

Jim: Oh okay. Yeah, okay. So what we did is we had the lease agreements in a lease option, the clauses were like three or four pages right, because that's the difference of a standard lease versus the lease option. So we had a lot of clauses in there. The number one was that all tenants were responsible for maintenance, up to I think like $3,000, we put a cap on it because we wanted to make sure there was a major thing like a roof, a problem with the roof, or appliances that we would come in and take care of those things. We also had a clause in there that's saying, if those problems existed for them that they had to notify us right away. I've had issues where there have been broken windows where they haven't notified us, and it's ruined floors, there's… the nice thing about these options I've found compared to renters, is they are a better tenant because their expectation is they are renting this as if it's their own and that they're going to purchase it someday eventually, right? And it's not people that are really bad, it's just something's happened to them. And I look for the one thing that happened to them. Maybe one of the people that are in the family has lost their job, so they got a bad credit rating. So now they can't purchase a house for three years, but they still have a family and they don't want to live in an apartment building, right? So it's not somebody that's a very regular occurrence of having… not being able to get a mortgage and somebody that had that one thing that happened to them, right?

Mike: Right, right. And so you pull credit or kind of just do a center check and then?

Jim: Yeah. So what I did, yeah, so what I did is I had my… again, using experts, right? So I tried doing some of this at first, and then I said, screw it. So I got a mortgage agent involved. And so, what she would do this mortgage agent, she would sit down with these people, run a full credit check, a full mortgage application. And she said, based on this, this is what you need to do, to be prepared to purchase this property in three years. So she would actually sign an affidavit for me that says, “If these people do these following things, they will be able to qualify for a mortgage in three years” right? And then, we put together an action plan. And so, part of the other contract we had in place was a regular… like what did I call it a, I forget the exact term. But I think it's a credit repair program, that's what it was, okay? So every six months they had to pull their credit because we didn't want to do it, because, you know, that hurts their credit. So they would pull their credit and they would show up, we'd have a meeting, these days we could have a zoom meeting. But we would sit down with them and go through their credit and say, “Okay things are looking good, keep it up.” And they would bring their statements, any kind of statements that we asked for, whether it was credit card statements and also any kind of income statements to prove that things were progressing. There was a series of things we had in the credit repair program. And so, it was actually a pretty tight process. And I had hired a… the other thing I had done was I hired a proper property management company to do all that collection for me, right? So I wasn't even involved in that. And then because we were doing volumes he was charging like fifty dollars a door to do some, to do this. And so, we would see how things were going with their payments, and he would produce a report and how things were, you know, were they making their payments on time. And so, I put all that together, and my assistant would sit down and say, “Yeah, this guy's good. He's ready to go.” And yeah, the insurance question I think is who buys the insurance. We always… So the way we structured the lease option is we look at all the costs that the seller had, so the mortgage payments, the taxes, the insurance, any of those regular costs. And then, we would figure out what the property, we'd sell the property for in three years. We did all the math and then we figured out what the payment would be. So let's say, all their stuff was, I don't know a thousand dollars a month for like whether what are the average house prices in your neighborhood, in your area up there?

Mike: What is that Angelique? You probably know. Oh, you're still muted.

Angelique: I would say about 750.

Jim: Oh wow.

Mike: So 750 in around Seattle, where I live. You know, in Kitsap County, I think we're like in the low fours low to mid 400,000.

Jim: Okay, yeah. I mean I was doing them in the smaller town. I was doing 150,000, 200,000. In Ottawa, we were in the 350,000 to 400 000 range. So about that, 750 is a tough lease option transaction just because the people that are looking to be tenant-buyers can't usually afford, what's that like a two thousand dollar a month payment on a 750 something like that, right? 

Mike: Yeah, today's interest rates.

Jim: But yeah, maybe not. Yeah. So what we would do is we'd start out with all the base costs, we figured out what the purchase price is going to be, we figured out how much they needed to save to be able to purchase a property. So we reversed engineering it. And in those days, they only needed about 10% down. So if they were buying a house for 50 or 500,000, they need 50,000 down. And they usually come in with a $20,000, down payment. So then we'd say, okay, you need to save 30,000, divide that by 60 payments and add that to the cost, so that's the rent payment. Does that make sense, their lease payment? 

Mike: So, um…

Jim: And there were all kinds… sorry, or just add there were all kinds of rules around, and people did it different ways, but you could add the cost, you could add that price right into the lease agreement. I like doing it that way. Some people said, “Well no, because then there's a lot certain laws prohibit collecting these types of payments.” But what I liked about it is if the tenant-buyer stopped, decided not to pay, we would continue like… if you can't evict them, we could continue charging the rents at that higher price, where it also included the savings program, the option consideration payments.

Mike: You said, if they weren't able to pay… so now they're going to buy it?

Jim: Yeah, so not everybody bought after three years, obviously.

Mike: Yeah. So they've continued as just a rental, but they lose that option to buy. Did you work with some tenant-buyers about maybe extending or be doing the terms?

Jim: Yeah, yeah. So we had three different types of exit strategies. I've had, obviously… The one we wanted to exercise the most was where the tenant ended up buying. So we probably did 60% of people who would end up buying. The other portion would be, they would just leave. I've had people with credits in there $20,000, $30,000, and they said, “Oh, I don't want to buy here.” And I said, “We'll buy it and sell it”. And they said, “No, I don't want the hassle.” And they'd walk away from this. And then the third one was, we would extend it. So I'd go back and I'd say, “Listen, these guys aren't ready”, for whatever reason, sometimes it was their credit, they weren't ready to buy, I'd have my mortgage broker look at it and tell them what they didn't do and what they had to continue doing or do better or it that just they it just didn't work out that they were able to close the transaction for whatever reason. So we did it. We've extended some, for a year. I don't think we've ever extended it more than two years. And then when the people who sold or people who left, I would go back to the owner and say, “Listen, we can, uh, do this again in which case you may… you already made a profit on this, right, because we got all the profits from all these additional payments, their option agreement and there's all that forced or all that organic equity in there now. So you probably got about $40,000 or $50,000 worth of profit in there, let's do it again, put another tenant-buyer. And instead of selling it for 400, we'll sell it for 450, three years from now. So I've done that.

Mike: Tara asks how you determine the price that you are going to sell the property at if it's three years in advance. Are you adding that appreciation factor in there?

Jim: Yeah. So I try to be very conservative on those, because you never know where the appreciation is going to go, especially, what's going to happen in the next two years. But I would look at historically. And in those days, appreciation was anywhere from 3%, 4%, 5%. So what I would do is I would frontload it with what I thought the high… so it was 4%. I put 4% or maybe in 5% in the first year, and then the subsequent years, I would lower it down just in case something happened later on. So it was 400,000, I would just calculate 400,000 times, three times three times three, something like that.

Mike: So obviously, we are in an interesting time, right now with a lot of stuff going on with pandemic and economy, and housing has been a challenge for a lot of people. The lack of it, had a lot of appreciation over the last seven, eight, nine years. What should somebody right now be looking at considering our current state of affairs and what might be in store for us, and how we can properly navigate the real estate market?

Jim: So first of all, I think we're in a bubble. And I think secondly, we're also in a false economy, because of the… Again, I'm talking about my experience and my knowledge of all these other industries or locations. But I think what's happening now is there's a shortage of supply and a shortage of inventory. And so, what's happened is like here, I don't know about your area, but we probably get 30 to 40 offers on any on every listing. And I heard from somebody a listing just sold a hundred thousand dollars over asking.

Mike: Wow.

Jim: So what's happening is because of the shortage, people are just desperate to buy homes. And the reason there's a shortage is, that people don't want people in their homes, right? They don't want to put these listings up, plus, they're also waiting to see what's going to happen. They don't know… so what's going to happen eventually though after things… and I was hoping this was going to happen in the next six months or so. But it might even be longer than that, because we're into round two now, right? So what's going to happen if you're familiar with the cycles of real estate, right, where you go up here in this peak and then you start going down, because the supply of ways that starts getting higher, so the demand… and so the prices start dropping again. But you're also going to get prices dropping, for two reasons, because number one is people aren't going to be able to buy. And number two is the inventory is going to be increasing. So as that happens prices are going to stop dropping within the next… well again, I don't know how long, but let's say six months to a year. So they're going to drop 10, 20, 30. Again, this depends on the area, not sure if you know, Seattle's a pretty strong economy. Ottawa is a pretty strong economy. But I mean back in 2008, 9, 10, when I lost 30% on all my properties, Ottawa only dropped about 10%, right? But the nice thing about in two 2018, 2019, 2010 is we didn't know that was coming. Here we sort of know. So I think people are getting ready for it. So that being said, where everything is going, it's hard to tell. I wouldn't invest in any long-term investments that are based on appreciation, okay? So if you're looking at getting into lease options… what I would do with lease options, is I would do assignment lease options right, a wholesaling lease option. So what I would do is I would get somebody under contract and then find a tenant-buyer and then just assign it back to them, okay? Lease options are probably pretty good for this economy. Fix and flips, with three months, if you can get a fix and flip done within three months, you're probably okay, where you can understand where the market is going. If you have to carry it out and you're doing bigger ones that are going to take six months or more, it's hard to judge where the appreciation is going to be or where the market prices are going to go after that. So do some. You know, wholesaling… I mean if somebody else is willing to take the risk and you can do some wholesaling, that would be a good strategy for you to look at. I have this whole profit pyramid, and I think my assistant shared it with you Angelique where I show the progression of an investor.

Mike: I think, I peaked at that, Angelique is that something that can be shared on the screen? Did you want to talk about that Jim?

Jim: Sure. I didn't talk about that for days.

Mike: Angelique is that something you have access to, to share your screen.

Angelique: I don't. But Jim, do you have it?

Jim: I do.

Angelique: Okay.

Mike: Okay Jim.

Jim: Yeah.

Angelique: I guess, I do have it, but I wasn't prepared.

Jim: No problem. It's amazing how technology or how proficient you become in technologies. I'm assuming you can see it now.

Mike, Angelique: Yes, we can all see it.

Jim: Okay. So this is something I put together as part of my education offering, right. I wanted something that was structured, I’m a very structured guy. As I said, I have a background in IT. So I've got a lot of systems. And so, I wanted something that made sense to people at all levels, okay? And so, what I call this is the profit pyramid. And people just getting started in real estate. A lot of people don't have any experience and most of them are looking at ways to earn income and they're not people out there, with lots of money let's go and buy apartment buildings, or let's go figure out how to bring in multiple investors. They don't have the experience to negotiate big deals with investors, and they don't have the money to do any of these purchases themselves. So what I do is I talk about getting into the game here at the low end. Can you see my cursor, as I move?

Mike: Yeah.

Jim: Okay. So doing some wholesaling and getting paid for wholesaling, anywhere from $500, I've seen people do million-dollar wholesaling where they get you to know 50,000 on a wholesaler. So at that point, you're just starting to get involved in real estate. And I think it's a good place to start, so that you start understanding, start learning the game, right? You start understanding what the markets are like, you look at how to evaluate properties properly, what's involved in your… getting into the lingo, what's an ARV, what does ARV mean, what are the renovation costs, all that stuff. And so, that will generate some cash. And they do that through these wholesaling or assignment fees, right? And you'll notice these first three levels are all generating cash. And I'll show you the difference as we progress here. The other is on right here, we've got key performance indicators. So the key performance indicator that determines how successful you are in wholesaling is the number of deals you can do, okay? Same with risk, risk on a wholesaling deal is pretty low, you're not engaged or you're not on any of the deals, you do an offer. If you can't sign the offer, you put it under contract. If you can't assign it, you just let the contract expire. The problem with wholesaling is it can be very active because you're always looking for properties, you're always looking for cash buyers. So you've got to be out there, uh, you know grinding it, so to speak. But you're learning a lot. So that's at the bottom of this pyramid. The next I like to say is lease options. So the lease option where you can make your money is in the spread. Although it looks like you're making money three different ways, you're really looking to get properties at. Let's say 400 000, and getting someone to buy them for 450. And over that, three years, you paid down the mortgage, for let's say 20,000, right? So the spread between when you're selling it is how much you owe on the property and how much you sell it, which could be like 70,000. And if you're doing a tenant, if you're doing a sandwich release, you could keep all that. If you bring in an investor, you could split the profit. And usually, what I try to do is on these deals, I was… when I brought in my, my investors… what do you call, the money partners, I would usually look at getting them 8%. So I'd look at a spread of about 16%. The key performance indicator there is how many leases can you put in place, how many lease option deals can you put. Again, the risk there is pretty low because the only risk is the appreciation concern. But the reason I say it's low is that the renters in lease options like were gold compared to any of my tenants I had standard rentals. It can be active. I put myself low here, just because I had brought in a virtual assistant to do a lot of looking for me. And then once you put a tenant in there, it pretty much runs itself for the next three years, you meet with them every six months and you just collect the rents and you pay the seller. So that's what I like to in… and really, when you're in lease options, you're negotiating, right? You're trying to get the seller, the motivated seller to give you their property for less than what they want to give, give it up for and you got to explain to them about the deal. I guess with the fix and flip, you're still negotiating. But here, now you're renovating. So fix and flips obviously, everybody knows what a fix and flip are. So where you make your money here is when you sell all the property, right? You buy it for less than, about 60% of the ARV. The after repair value, you put some money into it, you hold the property while you sell it, you put all those maths in there. And hopefully, you can sell it at a profit, right? And a good fix and flip will go anywhere from… I have 200,000 here, I would say a minimum you want to do a fix and flip for if you're going to spend the time on it. It's like 50,000. And the KPI, the key performance indicator is how many flips can you do. The risk there I think is high. Especially, if you've never done any before you should expect to not make any money on your first couple or you could partner with somebody, just to learn the ropes on the first couple, just so you understand. Because really the key here is understanding where the market's going to be. I find a lot of people are… they overestimate the price, they underestimate the cost, they think that they're going to do the next best thing on a property. They're going to… I've seen a lot of properties go on market that they should not have gone on the market at. They should not have been listed at that high of a price. I always want to list my fix and flips at what I call fire-sale prices, right? So like maybe now, it's different again too. But let's say if you know the market's saying you could sell this property for 500,000 listed at 480 and dump it as quickly as you can because if you start getting into a competitive market, you're going to lose money on carrying costs. Why do you have to hold that property, right? And then active, yeah, depending on if you've got a property manager or project manager to do it, your general contractor or if you're going to do it yourself, it could be very high too. So that's it. So these are the three activities that you want to do if you're trying to earn cash, right? So this is the kind of investment you do if you're out of work if you're looking for income-based real estate investing. The other two are where you're looking for income-based, meaning you take all this money and you dump it into these top two. So you can see on the right here. It shows these three here are cash, and then you take cash, and then you go out, you start investing in rentals. So it's something about this industry. I don't know people that have done three or four or five deals, all of a sudden think they can go out and coach people and train people on how to become real estate investors. Excuse me. And the sad thing is a lot of these people they're coaching get this bad advice. I've seen people out of work where they're trying to buy these rental properties to offset their income. Well, I don't know about you. But if you've ever bought rental properties in the early stages, you're not going to make a lot of money, right? You're going to maybe make $200 or $300 a door. So it's going to take a while before you can get to the point where it's going to replace an income of let's say, a $100,000 if that's your normal income. So what you're trying to do here is you're doing your short-term investing which is this bottom three, so that you can do your long-term investing. I have sort of a three-phased approach that I talked to everybody about: you start out as a part-time investor then you get into a full-time investor and then you move into a passive investor, right? And as you move up the chain here, the KPI for a fix and flip is the number of flips you can do. I already went through that, right? It's high. And now we're getting into passive investment. You go out, you find properties that if you can buy the motivated seller get them in a little bit of disrepair and you can force some appreciation by doing a few changes to some of the rentals. I'm assuming in your area, you can't make any money on rentals that's 750,000 for the property. So you're probably looking at multi-family units to be able to make any kind of return on your rentals. Again, the number of properties… a risk there is a medium. The only reason I say the medium is because you're going to, invariably, you're going to get a bad tenant, you're going to lose some rents, you're going to end up at the rentals board. So there's a bit of activity with rentals. Again, you want to get a good property manager, because remember at this point like personally, I didn't want to be in rentals at all after. And so, you want to take all the money that you're in here, buy rentals, get a rental management company to take care of everything and they should really be as passive as you can make it at this level. And then the top one is getting dividends. So this is investing in things like REITs investing in private equities by just investing in mortgages, private mortgages. So really being hands-off up here. And you know the number of investments that you can make, this should be a fairly medium risk. Obviously, the higher the risk the greater the reward and you can judge that by rework, by working with people that you know like, and trust. And the activity here should below, you should be looking at how can I place my money every six months to a year, and I've got this money maturing. So I want to reinvest it into something else. How do I do that? So yeah, so that's the sort of the profit pyramid that I teach. Does that make sense?

Mike: Yeah, it does. Appreciate that. I thought we had a question there, Angelique. I saw you had.

Jim: Yeah. I don't have any.

Angelique: Yeah. I don't know if this one's been addressed. My thought was that everyone is always worried about the problem tenant where they do serious damage for spite. If that happens, do you approach the original insurance company or does it have to be a landlord policy?

Jim: So if it's after the fact. I mean it’s kind of late, too late. I mean I've got horror stories for rentals. But, I mean, you're going to have bad renters no matter what. Obviously, you can reduce the number of bad rentals you have by engaging a really good property management company. That being said, I've had really bad property management companies, right? So I've had one tenant who left and left his dogs there for an entire weekend and they just basically ruined the place. I had to call the SPCA to come and take the dogs away that cost me a fair bit. I know there, it's pretty much the cost of doing business, right? So that's why I say when you own rentals, it's pretty hard to make any kind of profit if you're only looking at $200 or $300 a door. The only way I found that you really make money as rentals are to the point where you have significant equity in them. And the mortgages that you're carrying if any are minimal, so that the cash flow is significant so that it can cover any kind of problems that you have with bad tenants. You can go to your insurance company. I mean, I've made some claims against the insurance company like that, that dog owner for example. But then, I've had insurance companies drop me, because I've had three fires, right? Where tenants have caused fires. And the tenant or the insurance company says, “No, we, you, you're not following good practices” that you know, the fact that you've had tenants that have caused three fires. So yeah, tenants are the cost of being a real estate investor. That being said, if you can find a really good property management company, you don't, you won't have that issue. I have an expression, right? It's better to have an empty unit than a bad tenant.

Mike: That is true, yeah, especially, right now, because at least in Washington State, we're not able to evict anybody for non-payment.

Jim: Oh wow.

Mike: So you may be stuck with them for a while.

Jim: Yeah. I've had one guy that was in there. This was actually a rent-to-own guy and he resisted and fought and took us six months to get him out of there. And I think he ended up negotiating with the owner to do everything himself. So I just backed out of it, and said, fine you guys, uh, handle it, it was an expensive one for… I think it was like a $400,000 or $500,000 lease option deal. But yeah, because of the rentals mandate, all you have to do is come up with reasons why you don't want to go to the board, and they'll reschedule it, which means you got to wait another month or two to get on their docket or whatever it's called. And then, if he doesn't show up, then they say, “Oh well, we'll… and he can argue a valid reason, they will postpone it again. So I mean, I think we ended… it's always fun. So that's another reason why I'm… I guess a lot of that I did have a property manager doing it, but I still had to be involved, as you know the deal maker, I guess. 

Mike: Yeah. And Jim, I had a question, kind of in relation to the property manager. So you at one point mentioned that you're collecting a fee kind of like a property manager. Is that what were you doing in an official capacity? Do you have to be licensed, like a broker to do that in your area?

Jim: No. What I did is I had a property management company. So what I did is I just had an agreement between my property management company and the owners. So that was instead of doing a sandwich lease, I found that was easier. So I would just figure out the profit. Let's say my profit on a deal it's going to be 40,000, I would take maybe 20,000 upfront and I would say, “Okay, so 20,000 of this is going to be over 60 months”, divide that money into that. And I say, “Okay, my property management fee is going to be 200 a month” or something like that.

Mike: Got it. Now Jimmy. That was your question. I also see your hand raised on the attendees' list is… so if you have a different question let me know. Otherwise, I think hopefully we can answer your question there.

Jim: I can't see any of the questions because I'm sharing my screen, right.

Angelique: Sherry was wandering in the insurance area. If you could be an additional insured or has an additional interest in an insurance policy.

Jim: So if something happened to the property? Yeah, I didn't worry about that, I mean, I let the insurance that… I have had situations and I guess I should have been more diligent on that, but I have had situations. For example, I had one owner who went into bankruptcy or foreclosure and had to foreclose, and so the tenant-buyer lost everything, right, for this. So what I ended up doing is we just went in and found her another property and we ate the cost of doing that. And you know, I tried to make it a win-win situation, so I think the property we found for them was actually a better property. It's one of these things, you can keep yourself up at night if you worry about all the nuances that are going to happen. What I like to do is I like to address all the things that are pretty common. And then, if something happens, an owner going into foreclosure on a lease option… it happened to me once and I had 100 of them, right. So it's one of those things that you just deal with an outlier, and you just try to do the best you can. It's like some of these passive investments I'm selling right now or that I'm helping raise money for the private equities, some of these things just they lock you in for five years. And you know I get questions all the time. Well, what if I need the money, is there a penalty for taking my money out? And so, right now, there isn't. But again, somebody had a death in the family, so we said, “Yeah, we'll give him/his money back”, right or we'll let him take his money out without any penalty. So there's a human factor in it, as well. And you know, just trying to do the right thing. So I mean, you know, kill yourself if you just try to do all ever… try to cover all the basis on all on every piece of the variable that's out there. That's why I say, you just go out, you just start putting deals together, you're going to make some mistakes, you're going to get somebody who knows what they're doing. Like I said earlier, if I would have started again, I would find all the experts and I would put them in place and figure out some kind of arrangement with them whether it was a sharing and profit. But I would not do any of the offers myself. I used to write up my own agreements and bring them to my lawyers, and then we review them. I would put in offers without using a realtor. Now any deals I do, I always get a realtor involved, I always use an account and I always use a lawyer, I always use a property manager. I mean you can save money maybe a little bit of money depending on what you're doing. But I guess, what I do too is with my students, I'm not looking at helping people do one or two deals a year. I'm looking at people trying to do 20 or 30 deals a year. So when you get into those volumes, you're going to have some good deals, you're going to have some bad deals. And if you do things right, you're going to make more money than you're going to lose. I guess it's the way I look at it.

Mike: And kind of more on Brian's question regarding, something a lot of damage to the property or if there's a fire or flood or something that damages property, you should be doing lease options in a way where you're not putting much of… if any of your own cash into these deals. I would say that if you'll be putting a lot of money into a house, you should probably be on the title because there are a lot of other things, that you've got a lot of money at risk that's when things can go bad. But if you don't have your own money at risk, then…

Jim: Yeah. Well, as I said, I've never put any of my own money in any of my investment deals. Except for my very first property, I think about a thousand dollars on my credit card. After that, I just did all the seller financing, I did all the private investor’s money partners, right, joint venture partners, that's what I was looking at. And it's amazing. The thing about real estate investing if there's one skill, I would say, you need to really learn how to negotiate, right? That's why I like these bottom ones, these bottom ones, where you're negotiating with sellers for their prices. The next one lease options, you're negotiating with sellers on price, as well, but you're also negotiating with buyers on what they can afford, and then when you get into the higher ones or you know as you as you go through it… you're putting deals together, especially at the top ones, right, when now I'm negotiating with people to invest their money in some of these deals. So you're basically becoming… you're going from a negotiator into a salesperson.

 

Angelique: All right. I have some market dynamic questions. Diane was so eager that she wrote in before our meeting tonight, even asking some questions. Are housing markets turning down due to unemployed, high unemployment rates?

Jim: Will they or are they now?

Angelique: Just in general.

Jim: Yeah. I think, I mean, I mentioned that earlier, right? I said, I think right now it's because people are afraid to list their homes because they don't know what's… first of all they don't want people in their houses, plus they don't know where the market's going. But what's going to happen eventually is that there's going to be a lot of job losses. And so, people are going to have to start giving up their homes. There are two good things that are going to come out of that. Unfortunately, I mean you know, it's that you're going to be able to start buying houses at a reduced price, you're going to be able to negotiate with these sellers. And secondly, the renter's market is going to start increasing, because people can't afford to buy anymore. I'm sure that's always already a… you guys probably have a very active renter’s market, given that your house prices are 750,000. Are the salaries there reflective of that price or the… like what's that, what's an average?

Mike: Certainly, in Seattle in King County, we have a lot of techs, like we're talking about beginning Amazon and Microsoft and Apple and a lot of other companies. So there's a very high wage earner which obviously is driving those prices up.

Jim: Yeah. I worked with a guy, one of my students, he was in San Francisco, but north or south where whichever, wherever Silicon Valley was, that's like totally crazy. The average house price was over a million and a 1.2 or something I think when I was working with them. But then the average salary was like a quarter of a million dollars or something like that right all these software engineers. And then in those guys, two of them would buy a house together and almost like a frat party house kind of thing.

Angelique: So she's wondering if we're going to have the usual seasonal downturn that happens in the winter months. What do you guys think? 

Jim: Yeah. I think what's going to happen is that you're definitely going to have some kind of reaction here. Again, it depends on where the co, where covet is going, right? If we got this second run, but now with the Christmas Season coming in, and you guys got an election coming. So there's going to be all kinds of influences come December. And I'm hoping that some of the prices are going to start dropping because you can't keep going the way they're going. Have you seen a big increase in your area in house prices and on offers like the number of offers on a listing? 

Mike: We're still pretty hot when it comes to… it's still a hot seller's market and it's an inventory thing, like you mentioned, there are not many properties on the market. I would also add that we are way behind when it comes to new units being developed.

Jim: So housing starts had dropped.

Mike: Housing starts, and that I would… a lot of that's due to the kind of like the last recession. And you know, we just didn't have a lot of housing starts between then and now, not enough to keep up with the population growth, you know going to the… the job market in Seattle it's been red hot for quite some time. So we've got a lot of people that are increasing in the area. Yeah, and it's so um…

Jim: Sorry, the Amazon jobs aren't like the jobs in Silicon Valley though, right? Are they like warehouse-type jobs?

Mike: Not in Seattle. In Seattle, it's mainly the software engineers and you know the high AWS…

Jim: AWS?

Mike: Yeah. We do have we've, we've got in Bremerton and in Kitsap County, where I live. They're building an Amazon warehouse out there, distribution center.

Jim: Where's the AWS data centers? Are they…

Mike: They are in Eastern Washington. They have those.

Jim: Okay.

Mike: So land is cheaper out there.

Angelique: So I'll add to that question a little bit too. We have 25 days until daylight savings. And from my experience in the past, the market kind of halts right then when it starts getting dark at four or five o'clock at night, you can't see the houses as well, in the environment as well. And so that's what usually happens. I do think this year that the interest rates are going to keep spurring things to keep going a bit. So I don't think we will have the seasonality to the extent we usually do.

Jim: Well you've got the low-interest rates. You've got the kvetch, you've got your election. You guys have got so many variables now. It's very hard to predict. I just know that there's going to be a downturn eventually, right? Just like everything happens. I was a big property owner back in 2008. As I said, you know that's when I had the 100 units and I spent the next year-and-a-half negotiating my way out to like millions of dollars of deals, luckily. So I don't have any properties right now. I'm just selling it. So I would recommend, I mean, if you're looking for something really secure, look at somebody who's got large apartment buildings with low vacancies. So that's what I'm doing right now, and I'm selling these joint ventures… sorry REITs, because… and you look at the performance. So the retime… and these are Canadian REITs, so I'm not even trying to sell anything here, right? These are people that have good jobs. So they have like a less than a one percent vacancy rate. And so, they're performing very well and they're very secure. And so, if you want a place to park your money until you're looking at some of the higher risk, more lucrative ones, that would be a good place to look at, right?

Mike: Excellent.

Angelique: She's curious. One more question. She's curious if the telecommuting trend is going to be influencing our housing dynamics in the long run.

Jim: Well, certainly the… it's going to kill the commercial real estate, like in town that already has. We have so many commercial properties that are with release signs and companies that are closing up, right? Because of a lot of the companies like… we have uh Shopify, I'm sure you must have heard of Shopify. Their head office here is in town and they've moved half their workforce to home and given up like half their lease space, I think, something like that. So there's a few more, like a lot of soft… specifically in the software industry, because people can tend to work at home easier, right? There's not a lot of interaction. The guys sit at home, they put on their propellers and they start programming.

Mike: I certainly think that there's going to be a big shift when it comes to telecommuting. I think that there are companies right now that are realizing that they can get to be just as productive or potentially even more with their workforce at home, and then they're saving. They're saving money in office space. And then it's also going to keep a lot of people that would otherwise have to live close to the city to be willing to able to go save some money without the suburbs and still keep their same job. So I think that bodes well for communities outside of Seattle. And obviously, even in Seattle right now with the crazy landlord-tenant laws and everything that is going on there, I think that there's a chance you've seen an exodus, from Seattle.

Jim: I mean, yeah, what you're probably like on… like I don't know about your communities. But you know in Ottawa, here, we're probably saving about an hour and a half a day because you don't have to get ready, you don't have to go drive there, and you don't have to drive home. Now the problem is you're also five minutes away from your fridge, from your TV.

Mike: That's true. I work from home, I gave up my office back in April. And you know, I'm not able to get as much. Sometimes, I've got a five-month-old daughter too. So that's another challenge. But a lot of the stuff I could have just done in the office, the office that we rented, I can just do for my home and my advocacy home, so we could still communicate and resume and…

Jim: Yeah. My dog keeps looking at us, he says another walk?

Mike: So Steve asked about, can we go into more detail about going into foreclosure in a lease option on a market downturn? Is there a way to structure the deal to avoid that? So I guess if you're doing a lease option and…

Jim: Yeah. So what I did is I did have… like later on, we started… based on my lawyer's recommendation, we started registering the agreement on title as a consideration, okay. So we didn't have any position on it. But what we were able to do, is if the property did go into foreclosure, we were able to come in. And I think I did this once, where we would… I found an investor to just come in and buy the property out from the foreclosure. And it was before it went into foreclosure. So, we knew that the owner was in financial trouble. So we went in, we negotiated the deal with the finance company. I think where we made up some of the payments and we were able to take the property over. We've done that. But what, what you can do is you can register it as a consideration. So then anybody who's looking at doing any kind of legal action against the property would contact you, and then you're able to negotiate that.

Mike: Basically, we would call it filing a memorandum of option or memorandum agreement on the title. One thing I'll add it if you're leasing a property from an owner with the intent of a sandwich, you're making a payment to the owner. I think that you need to have some way to be able to check that the mortgage is getting paid. I think that.

Jim: Yeah.

Mike: For some reason, the owner, if they don't make that payment to the lender, you should have something in the agreement that you can pay their lender directly in lieu of paying the owner. So you could set yourself up, so you don't have to be in a situation where the house goes into foreclosure without you knowing.

Jim: What I did probably half of the time is, I made the payments directly.

Mike: Yeah. So that's a good safeguard against the owner. So what I used to do is I have the owner send me a copy of the mortgage statement, so I can kind of keep an eye on it, on the payment. You know, nowadays everything is online and all that you may be able to get access to, to have a login or something like that. So you can check. Or you get an authorization to release info, which is something that the owner would sign, that you could submit to the bank so that you could have permission from the owner to call and talk to somebody about the loan.

Jim: Yeah. At the end of it, I think I just had my property management company do a PID, they would collect from the tenants and then they would do a direct deposit into the mortgage company to make the payments directly. Because for that reason, after we had, I think there was one company that went bank or the one owner that went bankrupt, I said, “Okay, we got to figure out that this doesn't happen again.” And I think that I'm pretty sure that's what we did to circumvent that. Again, I had my assistant structure all that with my lawyer and my accountant.

Mike: Sure.

Jim: You can delegate, right? So I have an idea what we did, how we did it. I don't know but… that's why it's important when you scale, right, because people say, you know… one of the things that I found always funny is when they do the the cash flow analysis on rental properties and they leave out, you know, they do whatever the mortgage taxes insurance, but they leave out, uh, 5% for the vacancy, 5% for property management and 5% for maintenance, that's sort of the rules that I use. And they say, “Well, I'll do the property management myself.” Yeah, but then how are you going to scale? So number one, you're working for free, right? Number two, you can only do that for you, maybe 10 properties, if you have problem properties, but… so I always put, make sure that I have enough room in there to pay the property management companies to do the work. And then, you know, if you get enough units in there… again, because you're trying to scale, right? If you get enough units in there, you can afford to pay these people. So it's like pound wise or is it pennywise pound fuel, foolish or something.

Mike: Any other questions right now? So, Jim, so I obviously… we've got a bunch of probably different opinions about what could be happening in the market, you know over the next year or two, whether we may see a crash or things continue or, we see things flatten out. What are some general things that you would recommend for investors to do right now when they're considering a deal in order to kind of protect themselves against the worst but, maybe take advantage of things that aren't so bad?

Jim: Well, it depends on the deal. Are you, are you asking also what types of deals should they be doing or?

Mike: Yeah. Well, I think that you mentioned one thing like, if somebody wants to do a fix and flip if you can get in and out in four months, that's great just longer than, you know… things along with those types of lines.

Jim: Yeah. Do the wholesale lease option. I wouldn't go into any three-year lease option right now, because you don't know where the markets are going. I would hold off any type of long-term purchase for the next six months. What I would do though is, I would start like, if you… especially, if you're fairly new. And this is one of the things, I tell everybody to start going out and networking. So you want to start talking to all the realtors, all the mortgage brokers that you can, making 10, 10 phone calls a day. People are going to hang up on you because they know that you're a new real estate investor. But that's fine. You only need to get a few. And then start putting together a presentation of what your deal is going to look like so that you can start soliciting for joint venture partners. Because that's what really helped me scale, right? When I was able to bring in joint venture partners? Now a lot of people, they resist because they don't want to give away 50% of the deal, which I normally do, right? All my joint venture partners were 50% of the deal. But I remember putting up a slide once I was teaching at one of these, like these groups, like you have here and I put up a slide. And I think I had something like $600,000 worth of profit in like six months, just because of joint ventures that I wouldn't have been able to do with my own money, right? Like one of them was a four-flex, some guy just wanted to dump it. And so, I took it over right, and we made a few changes with it, we put in some renovations… sorry, put in good tenants in there. Next thing it's cash flowing. I think we got it, like in my market it was like 200,000, by the time we're done it was worth 400,000, it was renting cash flowing. But I joined a venture in this case. I was joined venturing with the seller, right? I call everything a joint venture, right? So motivated seller, you're still joint venturing with the seller, right? If you bring in a cash partner, a joint venture partner to buy it, you know… the only thing is when you're bringing in a joint venture partner you have all the closing costs that you have to bring into consideration too. So there's usually 2% to 5% depending on where you are that you got to bring into that formula, whereas, if your joint venture with the seller, all those costs are sunk, plus they're a lot more motivated and easy to deal with. Don't be afraid to ask too, right? That was one thing I was so, you know, like my niece, I was telling the story, I was telling you about, she says, “Well, I can't ask that.” Yeah, sure, whether they can say no. And if they say yes, then it works.

Mike: So the answer to the answer to any question that you don't ask is no.

Jim: Yeah. Most people are worried that they're going to look stupid. Yeah, guess what, you are. I used to work in the IT industry. And the smartest guy in the room that I… my friend Ed, he was always the guy that had the dumbest and most questions, right? And he learned the most stuff. Yeah. So in preparation I guess, you be cautious, hold off or like certainly… again, as I said, you got the trifecta coming at you, the winter season, the election and the… and round two of covet here. I would say, just start getting out networking, start looking at the next six months. Certainly, if you get a deal that lands on you, that's unbelievable. And yeah, and if you can fix and flip within, getting out in three months, you could do some of those, even those will be risky, depending on where you are, and that if you're… you know headed towards the trough yet, in very… like you said Angelique, you're getting into the winter months now, the sun's going down and you know and people don't want to travel in the winter looking for properties. You don't get much snow up in Seattle, right?

Angelique: Not much. But the rain does keep people in.

Jim: Oh yeah, right. Yeah, my brother-in-law's always bragging, because he lives in Vancouver, which is what like two or three hours from Seattle.

Mike: Very similar weather, maybe just a touch colder up there.

Jim: Yeah, yeah. So I think that's… and the other recommendation I would make is don't… try to get is the way to scale is to try to do as many deals with other people's money, right? And think about it, if you do two or three deals a year versus 100 deals in three years and if you're making a little bit less profit off of each deal, but you're doing volumes, right? I interviewed this guy, he was 32 years old, I think. And he had done a thousand deals, but… and he had everything systemized, right? He was working with wholesalers. He didn't have to look for any of his properties, all the pro… he told the wholesalers what he want. He had two or three teams of guys that are fixing and flip, any deals… he would do lease options, and then in 2008… Andrew Cordell, have you ever heard of him?

Angelique: Oh my gosh. I think that sounds familiar.

Mike: I think, yeah.

Jim: You might have had him. He's very active on the, uh,

Mike: One of the, uh, national re-events.

Angelique: I think so, yeah.

Jim: Yeah. He's now focused on money strategies; it's who his website, nice guy is.

Angelique: So my aunt and uncle had a luxury home that they sold on lease option and then the market turned down. And they were in that lease option, you know, obligated to it. So the market's falling as the people are leasing this home from them. And the people decide at the end of the lease of course not to buy because the house is worthless now. And so they were watching their value decline tremendously, um, by about 300,000, um, during that period.

Jim: Oh during that same 08, 9, 10 area?

Angelique: Yes, yes, yes. So that's another perspective to watch out for right now.

Jim: Right. That's why I say, if you can hit it at the trough, it'll be perfect. And the way to do that to watch is you just watch for the turnaround and prices, right? I mean, I saw it coming and unfortunately I was still recovering from the properties I have. So right now if you're not an investor, you're actually like… if you don't have any problems, you're actually in a pretty good situation. So that's why I would focus on building up your network building, getting ready for the turnaround here or if you want, you can do the lease option wholesaling. Lease options is a really good strategy. You know, pick up an extra 10 or 20,000 for putting deals together. But again, these, these things that I'm talking about they're not passive, right? These are very active, very… getting out there, like I said, you know, when I was starting out I was literally replying to every posting on every… or so on those two job boards on every rental and every for sale. But it was getting me deals, right? And getting me activity and I was learning lots. People get into real estate investing, if… and if they really want to make it big, you know, it's not a part-time job. It is a part-time job, but you got to really treat it like a business. That's the other thing, right? It's like… I tell everybody if you're starting open, incorporate right away what is it like in Canada, it's like 200 bucks to incorporate, and you get limited liability to a certain extent and you keep everything separate, you start recognizing your business, you don't even have to do a nuance to a numbered company. It helps you with some… there's a lot of tax advantages of doing it, a lot of legal advantages. Yeah, and it just… I made the mistake of buying my first five properties under my personal name, and I couldn't move them in, because if I did, you know, I'd have to recognize the sale. And so, I just kept managing them outside and it was a pain so… which it causes more logistics, you know.

Mike: Yeah. So I think it's probably a safe bet to be conservative when you go to your purchasing. I'm not against buying a, a buy and hold property at the moment, but I buy for cash flow and I want equity on the day and I buy it. So what I want to do is I want to be able… and I would actually have to do with any property I purchased, if it's a house that I intend to flip. I agree with you. I want to try to keep me at four months or less. So I'm not going to take kind of any big projects that are going to require, getting the city involved with a bunch of permitting and maybe architects or engineers or moving a bunch of walls or…

Jim: Yeah, yeah.

Mike: Doing that sort of thing, because you're dealing with some parts of your schedule could be out of your control. But even on a flip, that I intend to get done and, and on the market within four months. I want to have a plan B. So that if for some reason I can't sell it or don't sell it, then I'm going to be able to put a tenant in the property to cover the payment. And if I'm going to buy a property for cash flow, then I want to be able to have a minimum cash flow requirement, and I don't want to have a short balloon period and any kind of debt. So I want to make sure that I've got enough time to ride out any potential job for the market. One thing that we have seen in the past is you know… in the last recession, property values dropped quite a bit, but rents were not affected as much. In fact, what in a lot of cases rents started to increase when we were going through our downturn, as people were losing houses and they had to move into rentals?

Jim: Yeah. That's going to happen.

Mike: If you're not forced to sell in the short term, you can usually ride out a bad period. If you're wholesaling, you're not going to be on, you know, you're not going to be left holding the bag that's a low-risk way for you to be able to continue to market and build your skill set, talking to sellers, negotiating getting deals on a contract. And the whole goal is that, you know, if and when we do go through a downturn, you know, you're going to be prepared as we're going through that to accumulate properties that you'll be able to hold for cash flow as things start to move up again in the next wave.

Jim: That's like the old saying goes, you buy with uh… you make money when you buy. And I never buy for appreciation, certainly not for the rental properties. You always buy with uh… making sure that the cash flows from day one, some people… like in your market, I'm sure that's tough, but you know, there are deals out there somewhere. What's the…

Mike: In my area, it's a good spot for cash flow because we're almost half the median price here in Seattle.

Jim: And what are the rents there? 

Mike: Rents are, you know, for the average single-family three-bedroom home, they're upwards of 1800 to w200 a month.

Jim: And they’re probably good.

Mike: Yeah. A two-bedroom… you know, I've got a lot of small multi-families. So a two-bedroom 750 square foot unit will rent for 1250 to 1400.

Jim: Okay. And you do a lot of the in-law suite kind of forced appreciation strategy?

Mike: They're… well, so in our jurisdiction, they haven't been allowing non-occupant ADUs. They just, they just… they're starting… they're allowing that in the Seattle area in King County and then in Pierce County in Tacoma. They've recently started to allow that too. So that, that's been, I think that… it would be a potentially good niche for folks that are… for those of you who are investing those areas where you can… you take advantage of the opportunity to maybe finish off a basement into a second unit an ADU or you know in Seattle building a detached ADU, you know, there's definitely an opportunity for that.

Angelique. Right, I previewed one that they've turned it into a triplex and it was a single-family home, where they did the basement and they also converted the garage, so they just used the structures that were already there with our new laws that have been passed. If anyone knows anybody that's an expert on those laws in Seattle, that'd actually be a great talk for us, so let me know if you know an expert on that.

Mike: Brandon just mentioned uh, just was that today, no? Later this month, I'm going to proposing to remove that one rocket ADU restriction, that's good for me and for you Brandon. And he also… Brandon actually also asked, so Jim, you wouldn't suggest doing development right now, is that what you're saying?

Jim: I mean I've done some development. The problem with developments… what's going to be your list price, because the development's going to be six months to a year depending on what your permits, if your permits…

Mike: Are much longer than that over, over here too.

Jim: Oh is it okay? Yeah, I mean, I've done some three months of development that's taken me nine months, right?

Mike: Yeah, yeah. And you're getting aware that might even be a short period of time for some developments in the area.

Jim: Yeah, because obviously the builder is going to want his profit. And like you said, now all the building materials have increased 70%, you said Angelique, and in one of the… I forget what it was you mentioned earlier.

 

Angelique: That's true.

Jim: Yeah. So the cost of doing that that is crazy, and I don't understand like… like for me, there's so many properties on the market, there are so many deals, I like resale, even some of the new properties, I mean we have a tax that you have to pay, that's the only issue with new properties here. There's a new property tax that you have to pay. So it's a little bit more expensive to get new properties purchased. But there's enough uh, resale going on that you can always find better deals, and so, shying away from development.

Mike: Yeah.

Jim: The only reason you would do development is that you like doing development, right? It’s fun.

Mike: So Brandon asks, so do you assume constant rent price, prices through a recession?

Jim: I through a recession, the leases… so for example in the rent to own, all the leases I signed were three years, I have had leases where the payment or the leases did change like in the lease, I would fluctuate the lease payment price, like after a year. Let's say, I had three prices or three payment amounts, first year, second year, third year, during a recession, I mean it… like maybe not signed a three-year lease because you don't know where the prices are going. I mean there are pros and cons of each, right? You get the security. You lock-in. You know the price and everything's fine. The other thing is you might be leaving a bit of money on the table. I would recommend just locking in for three years. It's like a variable mortgage, versus a fixed rate. I mean years ago, you wouldn't even think of a variable rate mortgage. Now you wouldn't even think of a fixed-rate mortgage. I think everybody's buying variable rates because you can convert.

Mike: So I'm wondering also Brandon's kind of piggybacking on my discussion about how the rents that prices didn't go down much, even though housing values went down a lot in the recession. So I would say that they're probably less likely to be dropping, like that you know, it won't be as volatile as the housing prices if we go through a recession.

Jim: Well, I think they'll go up, right?

Mike: If the last recession is an indication, I think that you're right. Any other questions from anybody out there?

Jim: How are we doing so far? Oh, we hit your 90 minutes. That was fun.

Mike: Well, it's up to you Jim. And whether or not you've got anything else you want to share or if you have anything to wrap up with, it's really late where you're at so.

Jim: No. That's fine. I'll say, I'm going to grab another Netflix like I'm on to this new series. It's an old series crash and halter, it's an old story of the young IT days when in the 80s, it's based on IT and it's mimicking a lot of what happened then. It's not a documentary. It's actually a series. So no, I'm fine. I mean to summarize again, I think you know, there's no one knows what's going to happen, right? I mean, if you look at what's happened in the past and you know history repeats itself, there is going to be a recession as everybody I think agrees with that. When we don't know how is it going to come back, we don't know? If you're going to buy real estate, you can buy rental properties for the long term. Sure, that's not a problem. Obviously, I would recommend buying multi-family homes if you can joint venture with somebody, look at four units or apartment buildings because you're buying those with the long term. Anyway, so you'll go through two or three cycles if you're holding those for 20 years, right? If you're looking at income properties, fix and flip, three-month deals, wholesaling assignments, and stay away from lease options, unless you can get lease options. Now I wouldn't even go into lease options, the wholesaling lease option is what I would do because I was going to say, a state like sometimes I did lose lease options where I didn't increase the price, I just kept it the same. But that's not even a given now, right? They could actually decrease in price over, over the three-year period, like you just said uh, Angelique, you lost $100,000… whoever it was.

Angelique: Yeah. She went from 1.2 to 900,000, during that time.

Jim: Wow. So yeah, and that's a pretty expensive lease option, right? 

Mike: Right. So uh… oh Meg said the series is called Halt and Catch Fire.

Jim: Yeah, very good.

Mike: Den Masuria, do you have some contact information that you might be able to either flash on the screen or maybe we can just put it in the chat?

Jim: It's pretty. Yeah, okay. It's pretty easy, my website is just jimpellerin.com. And in there, I have a bunch of links too, either webinars or… I put out a ton of content. I'm putting out at least one video a day. I have a full-time content manager for me. And so, what I literally do is… if anybody's looking at a marketing strategy here I can throw some information in here is… I sit in front of my phone, I put my phone on a tripod and I have about 10 topics that I want to talk to on real estate investing. So what I'll do is I'll record those 10 topics, and then I just take those videos, I transcribe them, I convert them to an mp3 and then I transcribe them, and then I run them through a bunch of different software that I have. One's called Missing Letter. Another one's called MeetEdgar. And I do about three or four posts on Facebook a day, and then I do all these quote cards that I create through this thing called Missing Letter. So I'm putting about 10, about 10 pieces of content out a day. And I do that all with that one video, right? And then I have a podcast that I use the mp3 that I do, so yeah. So that's a marketing strategy. And you can see, you can find a lot of that stuff on YouTube or it's all on… again, it's on jimpellerin.com, you'll be able to see links to different, my different social media platforms, as well. If you want to check out my books, I've written three books on real estate investing one on… one is the strategies, it's not shown here, but I've got here. I'll just bring it up really quick. This is my investment strategy. I mean, I could go through this. But that's another half hour. But it's basically the steps that I use when I… in my books and when I teach people, starting at the bottom going from the nine steps and uh…

Angelique: I don't think it's up, if you're trying to show us something.

Jim: You can't see it?

Mike: No.

Angelique: No, I still see the camera.

Jim: Oh, okay. I think because when I shared the screen I just shared that, I didn't share my whole screen. Okay, yeah, okay.

Mike: But you have to unshare your screen and then re-share.

Jim: Okay. I don't, I don't even know where I, where I am now with the Zoom. I started this out saying technology. It's pretty good, right? Oh, there it is. New share, here we go. All you got to do is try, remember? I said earlier, you never know until you try. Hey, you see it now?

Mike: We do. Payday deal making and foundation, looks like.

Jim: Yeah. So these are the three different stages. And then on the bottom, this is the biggest thing I see too, just to cover these things really quickly. People get started in real estate investing. They go right in, they start looking at properties to buy or invest in right. But what they didn't do is, this bottom layer where they have to figure out what they want to do, like they have to put together a plan, they have to understand where they are both financially in their mindset. A lot of people like, I remember working with people forever and they're still working on their business cards. This is back in the day, when people used to do business cards or no have you put in any offers? Well, I'm still working on my logo. Hey, you don't really need a website guide. Go out and do offers, right? But what they're doing and they don't realize that they're procrastinating by doing, making work projects right, because they're afraid to make that offer, they're afraid to get out there and do things. So that's why that whole control thing is about mind control, it's about your financial situation, it's about getting people around you. The planning is putting together a business plan. And I have a one-day business or a one-page business plan that I teach people and then I skip the educated one. But you know you get a little bit of information. Don't spend too much time on it. Figure out what you're good at, what you want to do, and fill in the gaps right. If you hate numbers, go find a bookkeeper, an accountant. If you hate sales, go partner with somebody that's good at negotiating. And then, the second one is just going out looking for deals, looking at the market. I hate people who drive this for dollars things. I sit at my desk and I serve for dollars, right. You can find tons of properties now on Zillow, on Trulia, on Redfin. And then if you, and then if you're interested, you can… you know do a paper analysis and that's the analyzed, and then making sure you got your financing in place. And then go and do a deep dive. You know, it's the numbers game. So you do a hundred… you look at 100 properties, you do a deep dive on 10, you talk to three of them and you make an opera and you close one, right. And then at the top is where you actually pay day. So you actually become an investor when you invest in the property, then you have to manage whether you manage the property, manage the deal or manage the fix and flip, right, property management or project management. And then eventually, you're going to sell on a fix and flip on a wholesaling deal assignment, on a rental property. You're probably not selling, but where you make your money there is on your monthly rents. So it's starting at the bottom from A to B, right? So that’s my book. And so, I have a basic book called Foundations, which is based on this. And then my other book is, I have one on lease options, obviously, because I knew how to do lease options and then I just put out another one, well two while ago now, it's on passive real estate investing and then… Now I'm working on one more about life strategy. I have another whole other pyramid on that, maybe I could come back and talk about that. But it's not really real estate investing.

Mike: Excellent. Well, I think that we probably should start to wrap up. So Jim, I appreciate you coming out here and teaching us, and go to jimpellerin.com. And I think that you could… like you said, you could find you on YouTube, Facebook, probably some other social media sites, possibly.

Jim: Twitter, Instagram.

Mike: All right, perfect. And Angelique, any, any last words?

Angelique: No that does it for me. That was a fun conversation though.

Jim: Yeah. I enjoyed it too. It's been a while since I've had, you know one of these, and my Halt and Catch Fire episodes, going to get lined up now.

Mike: All right. Well, thanks a lot guys. I appreciate everybody coming out. And have a great evening. We'll see you in the next one.

Angelique: Good night everybody. Thanks for joining us Jim.

Jim: Okay. You're welcome.

Mike: Thanks a lot Jim, appreciate it.

Angelique: Good night Mike.

Mike: Good night Angelique.

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