Robert Leonard  04:56

Before we started recording this episode, you and I were talking about how you went on a six month sprint of reading 50 books. First, how did you even read that many books in six months while comprehending it all? And second, what were some of your favorite books that you read out of those 50?

Daniel Iles  05:14

So I started that year, with almost a month’s vacation in Mexico. The travel was paid thanks to my credit card points. And during that vacation, I tore through this huge book list that I just been accumulating over time and wanting to read but never actually following through to read any of those books. When I got home from vacation, I kept up those reading habits in the morning, reading the books, and then listening to them on my drive home from work.

 I averaged about two books per week, working a full 40 hours a week, which isn’t unreasonable for I don’t think almost anyone to get through that many books as long as they have that schedule in their time and place. And I was able to recall most of what I read from the books just by being able to highlight certain parts of texts that really resonated with me in my Kindle, which made it very easy to search after the fact. And then if I was listening to an audio book, for example, in the car, I would just quickly, using my iPhone, make a verbal note recorded and then use the speech to text to be able to make those notes and then reference at a later time.

I think overall, I retained a good bit of information from each book. But I think the most valuable thing I really gained from the experience was just the one or two pieces of information that really resonated with me from each book and allowed me to make a very valuable, very important decision, either in business or in my real estate adventures.  This is really the 80-20 principle at work, where 80% of the value I received came from just 20% of the content I read. And it’s okay that I can’t really recall every single fact that I read from every single book just because there were so many books because I still am getting 80% of that value, just by highlighting some of my favorite parts from each book.

Robert Leonard  07:02

What were some of your favorites?

Daniel Iles  07:04

So one of my favorites was “The 80-20 Principle” by Richard Koch. It really allowed me to get into the right mindset, that I don’t need to extract every piece of information and memorize the entire book, reading it, but rather, I can just get the value from that book and move on to the next one. And other than that, I just read a lot of real estate books, which really helped me understand the technicalities of real estate since I hadn’t invested in it before. I didn’t really have anyone to mentor me or guide me through the real estate investment process.

Robert Leonard  07:33

I love audiobooks as well. So I was able to read quite a few books, it was in 2019, I read 60 or 70 books in a year or so. So when you consider 50 in six months, it’s not quite as many. But I was able to read a lot because I had about an hour commute each way to work as well. So two hours a day in the car five days a week, typically, you’re able to go through a lot of audiobooks. And once you listen to them for a while, at least for me, I was able to listen to them at 1.5x speed, sometimes even twox speed.

So you’re going through an eight hour book in four hours, that’s really only two days. So you could get through two books a week, or sometimes even more. So that worked for me.  I’m a big fan of  “The 80-20 Principle” , I actually haven’t read any books about it yet. I’ve only read articles and done a little bit of research online about it. But it’s a principle that I love and sounds like I need to pick up that book.

Daniel Iles  08:22

 The 80-20 principle articles really do explain the entirety of the book. And the book just goes on to list several examples of where this is at work, or maybe different permutations from that 80-20 principle where it’s the 90-10, or the 99-1. But either way, extracting as much value as you can with the least bits of text possible, I think really helped me out there. Not highlighting the whole book, but just getting the few key points to where I can use that information and benefit from it.

Robert Leonard  08:51

I had never really thought of it like I said, I’m a big fan of the 80-20 rule, but I’ve never really thought of applying it to books. I typically only apply that to business or investing. I tend to think –okay, in my podcast business, what are the 20% of things that I can do that I need to focus on today that are gonna drive 80% of the results. But that’s a really good point about the books. And I might need to think about how I approach reading books going forward, applying the 80-20 principle.

Daniel Iles  09:18

Absolutely.

Robert Leonard  09:19

Those 50 books, they must have been pretty powerful because you went on to purchase, like you said, over a million dollars in real estate in just your first year, which encompassed about nine units. And you only used $23,000 of your own money. I mentioned this in the intro, I wanted to bring on a guest like you because you weren’t rich to start and you are working a relatively normal accounting job. Yet you were still able to accomplish the real estate successes that I just mentioned that you mentioned. I think that’s going to show the audience that anyone can do it too. And I think it’ll be super relatable for everybody. So let’s break down the $1.1 million in real estate that you bought? Where did you start? And what was the first deal you bought?

Daniel Iles  10:04

So I started with one of the most powerful loans available in the United States. That’s the FHA insured loan. I truly believe that the FHA insured loan is one of the most powerful wealth building tools available to the public. One of the most powerful aspects of real estate investing is that you have the ability to invest and buy those assets with leverage, using a small amount of money to control a large amount of assets. The FHA loan provides more leverage than almost any other loan product available. It allows someone to purchase an investment property with only 3.5% of the total purchase price as a downpayment.

So my first property that I purchased was a duplex that I bought for $250,000, with less than $9,000, of a total downpayment. One of the stipulations to the FHA loan program is that you have to live in the unit, which actually worked really well for me, because I was able to practice being a landlord and kind of getting comfortable with the idea of owning rental property, because I was just living in one unit. My next door neighbor was the only thing that I had to manage.  But by renting out that other unit, I was able to cover the mortgage completely and get rid of probably the biggest expense I had at the time, and the biggest expense that most people have, which is my housing costs. And even this first step done correctly can remove the biggest expense in your life, the housing costs.

One purchase with an FHA loan, one property, and you’ll never have to pay rent or mortgage ever again. And that is just such a crazy powerful thought.  I think that that’s just like the average outcome, if you buy a single duplex. If you use an FHA loan to buy a fourplex, with three tenants, all paying your rent instead of just one, you suddenly have all of your housing costs for the rest of your life covered, likely a good bit of extra cash flow every single month.

And at the end of the 30 year loan, you have an asset that has appreciated likely close to, if not more than a million dollars owned outright by you that was paid for by the tenants. It’s just this crazy, like mathematical way that real estate works, and it’s extremely, extremely powerful. I think for all the high schoolers and college students listening to this: this is one of the most slept on opportunities available to you if you’re looking to invest in your future.

Robert Leonard  12:27

I would even say even if you’re past college, it can still be a very powerful strategy. And the strategy you’re talking about is house hacking, leveraging an FHA loan, but I’m 25. So I’ve been out of college for about three, almost four years, my birthday is next week. So four or five years, I’ve been out of college, and I’m still house hacking. I’m on my third house hack. I just closed on it last month. So if you can do it out of high school or college, the earlier you can do it, the better.

But just because you’re listening to this, you’re 25/30, that does not mean you can’t do it. Definitely you can. I agree with what Daniel said, I think this is hands down the most powerful strategy for new investors to get started. I think wealth-building wise, you’re just able to generate so much wealth from owning real estate as well as getting rid of your largest expense. And then on the education side, you’re able to learn how to be a landlord. So if you want to buy rental properties, you already have a big step in the right direction.  You said you put about $9,000 down on that property? How did you cover closing costs? Is that included in the $9000? Or is that on top of it?

Daniel Iles  13:26

So with FHA loan and kind of the current state of the market, it’s pretty common to have the seller cover all of the closing costs, which is a pattern that I followed with all of my other properties, it was always negotiated in the deal, that the seller would cover all of the closing costs, or that some of the closing costs that weren’t covered by the seller, were lumped into the loan, and that my 3.5% down payments would cover those closing costs as well as a higher loan cost. But it’s not something that I have to pay for the next 30 years. So it’s just amortized into the loan.

Robert Leonard  14:01

I love that you mentioned that because I just talked about that on a couple episodes ago, and that’s called seller concessions or seller credit. And I personally think that house hacking is a strategy that’s slept on by most people. But I think as an investor for people that are already investing, I think seller credits are super overlooked. I’ve done seller credits on every single real estate deal that I’ve done to date, whether it’s rentals or house hack, and I think it’s a great way to be able to get into deals for less money. So if you want to learn a little bit more about seller credits, go back to the episode with Philip Michael. I gave a good breakdown on how I use seller credits to get into my most recent deal.

Can you break it down for us on that duplex? Where was it so that people can get an idea of the market and the opportunities available, and then also your mortgage cost and the rent that you’re able to receive?

Daniel Iles  14:51

So the property was purchased in Alaska. I live in Alaska, invest in Alaska, and it was purchased in North Pole, Alaska. That’s literally the city. That’s what it’s called. That’s where I kind of grew up. It was a $250,000 duplex, it was an upstairs, and a downstairs, the downstairs rented out for about $1925. The total cost of the mortgage was only $1600. So there was a little bit of cash flow, you could think of it that way every single month. But in reality, the $1600 only covered PITI, which is Principal Interest, Taxes, and Insurance, meaning that there were some utility bills as water that I needed to pay for and heating fuel because we are in Alaska, and it’s very cold.

So really, that extra little bit of cash flow didn’t go into my pocket, and it was just paid to the utilities. But it did leave me in a position where living upstairs in the unit that now rents for about $1550, I was getting my rents completely covered. It was a beautiful stairs spot, really one of the favorite spots that I’ve ever lived in, and $1500 that I was able to get completely for free every single month because I was able to purchase the assets rather than just renting a spot for $1550 every month.

Robert Leonard  16:06

And so you did keep that property when you moved out?

Daniel Iles  16:09

Yep, I did keep the property when I moved out, I stayed there for quite a while, while I kind of fixed things up on myself and tried to experiment a little bit with landlording. Setting up the processes and rules required making sure that I’m following all applicable laws. All of that part of the business definitely takes some time; it’s not that you can just suddenly buy a property and start making all this money. There’s a lot of work that goes into it. But living in the unit, having full control over what goes on being very aware of what my tenant is doing, they’re not doing, what the state of the property is, was very valuable for me when I was just starting out.

Robert Leonard  16:43

House hacking is often covered from the perspective of being able to reduce your living costs, which I think is one of the most valuable points of house hacking. But the piece that isn’t often talked about is when you leave that property, like you said, you were already technically making $300 a month in cash flow, or at least the rents were that much more than the mortgage, you had some utilities that you had to cover and things like that. But just in general, the rent for one unit was already $300 over the mortgage. And then when you were able to leave, all that additional rent that you’re able to generate from that second unit was essentially cash flow for you. Now you have an amazing rental, that you only had to put $9,000 down on that you can hold for the next 30 years. That’s a great cash flowing asset.

Daniel Iles  17:22

And you can look at it this way, the almost $1600 that I was receiving and cash flow every single month after moving out could have been used to buy literally the same exact price asset: $250,000 house with a mortgage and a mortgage payment of $1600. Meaning I could have moved out, bought myself a primary residence–a house all for myself that I love that’s $250,000. And it would have been completely covered by that first FHA that I bought.

Robert Leonard  17:51

That just illustrates how powerful that this strategy can be. Can you imagine if instead of buying a single family, you buy a second house and do the same thing, or you buy a third one. And then before you know it, you have three assets that are generating $1500 apiece, and I have $4500 in three years of cash flow. And you only had to put $9,000 down on each one. And that is why house hacking is so powerful.  Daniel, where did you go from your first deal? What was your second deal? What did that look like?

Daniel Iles  18:20

So the process that you just explained for your house hack again, and again, I think that’s a great strategy. But I felt pretty comfortable with the real estate management aspect of investing. And so I decided to kind of turn up that dial a little bit using what I knew about accounting and small business banking to take the investing to the next level.

So my second property was a duplex that I never lived in. And it was purchased with absolutely no money down. The $1,000 earnest deposit that I paid to show that I was interested in actually following through and purchasing the property, I got back when I went to the closing table to acquire the property. Like I literally left the closing table after getting the house with a check in my hand. And this was done through a series of strategies that like I really need to coin a name for this. I just don’t know what to call it. Maybe the listeners listening to this can hear me out here, hear me explain it and then maybe just like hit me up on social media telling me what they think I should call this strategy.

But the first step in the process was getting a property that was under market value. So my wife found the property listed at $175,000. And it was just on Zillow, but it had been sitting there for eight months. And the experienced real estate investors listening to these ones that have been through there a couple of years know that if a property is sitting on the market for eight months, it is going to be a crazy, crazy good deal. And it absolutely was.

So I was able to negotiate that property by having an amazing inspector, go in there and just write this super long–I think it was like 17 page–inspection report. It was an absolute horror novel of every single thing wrong with the property and it was a very powerful negotiation tactic. It allowed me to get that property for $130,000. So as originally listed eight months ago at $175,000, I was able to get it at $130,000, meaning that $45,000 price difference came strictly from having a great inspector and being able to negotiate on that property. So I got the seller to pay all of the closing costs, like we talked about before. And that was just pretty common in today’s market. Nothing unusual there.

The second part of the strategy required getting a flexible financial institution to be able to fund this property for me, and that was actually a little bit more challenging. So I knew that none of the big banks would go for this, none of the commercial banks that you see, like in the Super Bowl commercials, they don’t do any kind of flexible lending, so I didn’t even bother talking to them. I don’t know if I can say the bank names here on the podcast. But everyone knows exactly what I’m talking about. The people that run commercials on the TV stations, if anyone even listens to the TV anymore, but those kinds of things are completely useless.

So I instead went to the credit unions and the local banks, I knew from my small business experience, that the flexibility came from these smaller lenders who owned the loan rather than selling it out to the highest bidder. And in the real estate world, these are called portfolio lenders. I wanted a very specific portfolio lender that could work with me on a very specific quality of the loan, which is that I would be able to get a loan on the greater of the appraised value or the purchase price of the property. I knew that usually banks like to lend on the lesser of because it keeps them safe in the event of a default. They just have a little bit more room in the deal. So they prefer to lend on the lesser of the appraised value or purchase price.

But I instead was able to find a credit union who lent it to me on the greater of the purchase price or appraised value.  I called dozens of banks to figure this out, it really took a long time finding the perfect credit union. But once I found them, I was able to use them for my next deal. So it really was worth the effort.  The next step was to get a higher appraised value for the property. That was really easy because I negotiated it from $175,000 down to $130,000. It appraised at $150,000, which was really great for me. Where a regular bank would have been able to fund this property purchase of $130,000, with a loan, based on the $130,000 property price, maybe at about an 80% 85% loan to value, I could use this credit union to get a bigger loan by having that 85% LTV be based on the appraised value.

So this means I was getting a loan for the property that I was purchasing at $130,000 for $127,500. Then after a quick phone call with my super flexible credit union, I was actually able to convince them to get me a loan for $130,000. I’m rounding it up a little bit. And I know that the $2,500 down payment wouldn’t have stopped me from purchasing the house, I had $2,500. It was just so close, and I was going for that weird flex of not having to pay any money at all, which ended up being pretty cool. And then of course, I’ve mentioned the seller paid for all the closing costs. So I was able to acquire this duplex with just negotiation and an understanding of how the system worked.

Robert Leonard  23:21

When you were calling around all these different credit unions, what types of questions were you asking them? What were you diving into or digging into to figure out if they were going to be able to offer the product or service that you needed?

Daniel Iles  23:32

So I created a super long Excel spreadsheet of all the bank names, all the phone numbers, not just in my state, but in a lot of states down in, we call them the lower 48 states, the other states basically. I was calling a bunch of smaller credit unions, bunch of lower banks, smaller banks, and I just went right for the kill. I asked them straight up whether they would be able to offer me a loan based on the greater of the appraised value of the purchase price.

Usually this is something that even the person picking up the phone could answer. You know, they would quickly talk to a loan specialist and I would get a yes or no. I tried to do as many as I could through email, many of them wanted me to phone call. So it took a couple of days, but again, this was an investment that I was making in my network to have for the next several properties as well.

Robert Leonard  24:19

And so you were able to find a credit union that wasn’t in your state or even city that was able to offer you this product or service?

Daniel Iles  24:26

Yeah, I know that credit unions usually like to have membership within their local area, but they didn’t seem to mind. It seemed like a great deal to them. To be honest, I don’t even remember what state it was in. It was either Ohio or Idaho, or one of those. I’ve done a few deals with them. I don’t really look at where they’re from. I just know that they are awesome to work with. The loan officer that I have is absolutely incredible. She’s been so great through all this super flexible so I can’t complain.

Robert Leonard  24:53

Yeah, I guess the specific state doesn’t really matter is I guess the point is that they weren’t in your state which I find interesting because a lot of a lot of the lenders that I’ve worked with have wanted to be local to the property. I know you mentioned the membership eligibility for credit unions, which is a specific feature of credit unions, but just lenders in general, like I got a bank loan for a different rental property that I own.

They would only lend on the property if it was in the state in which they were located. So it’s interesting to hear that you were able to find a bank, not only to offer you a non-normal, abnormal product or service that most banks can’t, or credit unions can’t, but also not even geographically anywhere near the property.

Daniel Iles  25:33

And I have had issues with banks just recently turning me down because I moved across cities across the state, just about 300 miles away. So I understand why they don’t service the loan that I’m looking for now. But yes, this credit union was extremely flexible at the cost of a really high interest rate, I will admit, the interest rate was I think, 7%, which for a short period of time, before I was able to refinance into a better loan worked absolutely great for me, I still made tons of money with a cash flow.  And really, I think that’s how anyone would approach the same situation. If the numbers still work out, even if it’s a 12% interest rate, even if it’s a 15% interest rate, it’s better than not getting the deal at all, because at the end, you still make money.

Robert Leonard  26:13

That was exactly gonna be my next question: what were the terms of those loans? Were they 30 year fixed debt? I mean, it sounds like they were a higher interest rate. So it could have been 7%. But was it still a 30 year fixed debt?

Daniel Iles  26:23

No, it wasn’t. So again, this was a portfolio loan. This is essentially an investment that the credit union themselves were making with their own money. And so they needed very different terms from what’s common in the mortgage business, which is a 30 year loan. I instead got a 20-year term with a five year balloon at 7%. So looking at it from like a comparison perspective, it’s a terrible loan. And, of course, there are worse loans, there are hard money loans, which are way more expensive. But for my purpose of purchasing this property and acquiring it, it was great. And after the fact I could go on to either sell the property, I could flip it, or I could refinance under better terms, which is what I did with a couple of my properties.

Robert Leonard  27:07

So it sounds like they went through there. Typically, if it’s a portfolio lender, and they’re offering a 25, usually, a commercial loan is what I’m used to hearing, and sounds like that’s what you did.

Daniel Iles  27:17

So it was a 15% down, actually, that I did. So I got an 85% LTV, which again, is really unusual. But since they were a portfolio lender, they were super flexible with me. And like I mentioned, they even adjusted the total loan amount after the fact from the $127,500, which we had both agreed upon to $130,000 just as a rounding favor.

Robert Leonard  27:40

Walk us through the refinance process. What did that look like when you went to more conventional debt?

Daniel Iles  27:47

So in the process of refinancing, I also made an effort to be able to mitigate my risk a little bit more. Having these types of loans, which are almost like hard money loans really aren’t ideal. And being able to refinance them into something that is a little bit more stable for a longer term perspective, definitely kind of managed my risk a little bit more.  But at the same time, I used that opportunity of having to refinance, to lever up just a little bit more.

So despite not having any of my own money into the deal, I did have equity in the deal. That allowed me to both be exposed to risk and also allow myself to get, I could say, into even a little bit more debt to actually mitigate that risk. So my risk from these properties was that if a boiler gave out, if the roof leaked, if a pipe burst, I would still have a lot to lose, because I have the whole property to lose. It’s technically under my name. Even though I didn’t pay my own money for it, I have equity in it, I’m responsible for taking care of the property.

So what I ended up doing to refinance one of my properties was that I made a few strategic upgrades: paint, carpet, trim, the easy stuff that adds a lot of value. In an appraisal situation, I had the property appraised for a much higher value. For example, that $130,000 duplex that I talked about, after a couple $1,000 worth of upgrades was appraised not at $150,000, which it was at first, but rather at $200,000.

And by refinancing, I was able to get into a better loan product with a 30 year term, or maybe it’s 20– I honestly can’t remember–at a 5% interest rate, which is way better. No balloon, and I ended up actually both making money from the refinance that I get to put in my pocket tens of thousands of dollars. On top of that, I also now have a higher cash flow because the interest rate and the loan terms are a lot better.

Robert Leonard  29:45

Was there a seasoning period between the small credit union loan that you had and the refinance?

Daniel Iles  29:51

So the refinance was with another small credit union, and I did reach out to several banks that required a six month seasoning period. It’s not something that I wanted to go for with one of the properties that I was refinancing. The credit union was able to work around this. They didn’t require the seasoning period, because again, they’re flexible, and I’m assuming they were lending their own assets to be able to refinance this property not selling out to an investor or a government institution.

Robert Leonard  30:19

After that second property, where did you go from there? How did you acquire the rest of your nine units?

Daniel Iles  30:25

So the third property was another similar situation where I used my flexible credit union to kind of avoid paying a down payment. Then the fourth property after that was actually my wife’s FHA loan when we had to move for work. In total, the only actual money down that I had to put to be able to buy this over $1.1 million in real estate assets were the two FHA loan down payments, which total a little over $22,000.

Robert Leonard  30:55

You also mentioned to me before the show that since you acquired that $1.1 million in real estate, you’ve rebalanced your portfolio a bit to manage some risks. Why were you concerned about risk? And what steps did you take to mitigate it?

Daniel Iles  31:11

So as I mentioned with that risk, even though I didn’t pay money for the properties, I still had my own money on the line. If a terrible disaster happened with one of my properties that I wasn’t able to fix quickly enough, because I didn’t have the cash or some other reason, I wanted to make sure that I had the resources available to me to make that repair, and to get out of there with not a lot of terrible other debt, like credit card debt, required to usually fix up properties.

So in mitigating that risk, I was able to refinance one of those properties, and get about $15,000 out that I would have as a safety net, in case a huge disaster happened like a flood, or the boiler gave out and everything froze up, or just even if a tenant trashed the property. I would have that $15,000 from the refinance, just by switching loans and kind of restructuring the debt to be able to use at my advantage.

Another way that I managed risk was that the first property that I bought with $0 was a little bit of a higher risk property. It was a C class property, which generally means that it’s a little bit older, it requires a lot more repairs, and maintenance. And the demographic of tenants that usually rent out those properties, is slightly more challenging to manage. It honestly wasn’t really worth the effort. So I mitigated by my opportunity cost and having to work a lot with that property for seemingly a lot of cash flow on paper, really not enough to make it worth the effort.

I was able to trade that C class property for a property that I bought as a primary residence for my wife. I essentially used that $130,000 house that I bought for free, which then appraised later at $200,000, and I traded it up for a primary residence worth about $500,000.  I know that the cash flow and equity that we earn from real estate definitely covered the downpayment and the upgrades from that new house.

But I can admit, like all honesty, it probably wasn’t the best financial decision considering the opportunity cost and what I could have done with that money instead, in the stock markets, for example, these last few months. At the same time, it was a lifestyle decision, it made my wife extremely happy to be able to have this beautiful house right next to her parents. I think it was well worth the opportunity of a lifetime to be able to do that.

Robert Leonard  33:36

Where do you want to take your real estate portfolio from here? What are some of your long term goals?

Daniel Iles  33:42

Long term, I definitely want to buy more properties with as little money down as possible. I think it’s really fun. And hopefully, in the future, I will be buying more B and A class properties, which are a lot easier to manage at the cost of less cash flow, I’m fine with less cash flow, I feel very secure with the current revenue that I’m making for my real estate investments, and more.

So thinking long term in the future, I want to be able to purchase properties and ride the principal pay down and appreciation waive that those gift to me, with a lot less management involvement, either from me or from the management company, and just by these higher priced units, which of course are going to be a lot more expensive. But that just means that my investment is going to be bigger every single time that I purchase a new property.

Robert Leonard  34:30

For a new or aspiring real estate investor that’s listening to the show today who might have big real estate goals or even they just want to get their first or second deal done so they can get started. What’s the best piece of advice that you can give them?

Daniel Iles  34:44

I definitely think education is the greatest limiting factor preventing your success in real estate. It’s definitely not the money. You don’t need much of that or even any at all. You don’t have to be born rich to invest in real estate. I just really think that it’s important to be able to recognize the resources you have and properly implement those. And I think most of the people listening to this podcast are already well on their way to getting there. Listening to this podcast, obviously, they show some kind of interest in this and the people listening right now you should probably listen to a couple more episodes after this one just to keep the ball rolling.

Robert Leonard  35:17

For those listening that are interested in learning more about you and your strategies and might want to connect with you to discuss them, where’s the best place for them to go?

Daniel Iles  35:26

You can connect with me on my socials. I’m pretty big on TikTok and YouTube, just search Daniel Iles. That’s Daniel Iles. Also I’ll show up in the search. I’d love to help you out with whatever questions you guys have.

Robert Leonard  35:40

Anyone who is interested in connecting with Daniel further after the episode, and wants to learn more from resources that we talked about with Daniel, they’ll all be in the show notes below. Daniel, thanks so much for joining me.

Daniel Iles  35:52

Thanks so much for having me on.

Robert Leonard  35:54

All right. So as I mentioned in the intro, we actually have two guests today. That was the first half with Daniel Iles. And now we’re going to get into the second half of the episode with Andres Bustamante. We’ll get right into the conversation with him here. Andres, thanks so much for being a listener of the show. And thanks for joining me today as a guest. Welcome to the show.

Andres Bustamante  36:15

Yes, sir. Thank you, Robert, I appreciate you having me on the show.

Robert Leonard  36:19

Let’s start the conversation by learning a little bit about you. briefly tell us your story and where you’re at today.

Andres Bustamante  36:26

Perfect. All right. So my name is Andres Bustamante. I am 24 years old, from El Paso, Texas. I moved to Austin when I was 19 to go to the University of Texas at Austin. I originally thought I was going to do supply chain management. Turns out I didn’t do that. When I was at school, I became a leasing agent at the age of 19. And my first sale as a leasing agent was actually a $1 million condo. So that was pretty awesome.  When I was a junior, with the money that I made through leasing, I was actually able to pay for my college, and also pay for my housing. So that was great. I learned the power of real estate and just in general, having the time that I chose to do whatever I wanted. And so with this, when I graduated, I decided to do real estate full time. I am now a real estate agent in Austin, Texas, and I have three investment properties.

Robert Leonard  37:19

You mentioned to me before the show that your experience studying abroad in France made you realize that you wanted to be able to manage your own money and your own time. But I think there’s a lot of different ways that you could do this. Why did you choose getting your real estate license as that option?

Andres Bustamante  37:37

It’s pretty crazy. I am really a big believer in like the law of attraction and just setting the right vibrations and setting that out to the world and something will eventually come to you. So with that I feel like initially, I wanted to do lifeguarding because I was a lifeguard when I was 16. I was going to do that lifeguarding at UT Austin. I ended up not having the license; I had to renew it.

So a month later, my friend tells me he’s like, dude, there’s this real estate course that you should take it, I feel like you’d be good at it. You should be interviewed by this company housing scout.  So I was like, you know what, let me do it. I got interviewed, and I got the job. It was kind of luck on that part. But also at the same time now that I think about it, once I did get my license, it was great because it offered me the flexibility to choose when I wanted to work. Also just in general, if I worked hard, I would get a lot of money through leasing.  I mean right now it’s just the flexibility and the opportunity to choose whenever I wanted to work. And the money I make is based on the effort I put into it.

Robert Leonard  38:42

Now that you’ve become an investor, and we’ll talk about how you made that transition, but now that you’ve become an investor, have you found that having your real estate license has actually helped you be an investor?

Andres Bustamante  38:52

Oh, yeah. 100%. I mean, with this through leasing, I really learned how to deal with property management companies. Whenever I would bring clients for leasing, the first two years were a little hard, because I was just like–who am I to bring 23 year olds, 24 year olds from UT Austin with their family and tell them about apartments? So at first I was a little nervous about that.  But then, I started going junior and senior year, I wasn’t really afraid anymore. And I got a lot of clients with that. So I mean with this, I really learned how to speak the real estate lingo. From there, I really knew a deal when I saw one with apartments, and that also goes to houses for sale now, because I just learned so much through those four years that it eventually got into that full time sales position.

Robert Leonard  39:42

As you were nearing the end of your college career, did you consider a traditional route the traditional career? You mentioned you were studying supply chain. Or, at that point did you really just end dead set on real estate sales?

Andres Bustamante  39:55

I had plenty of internships while I was in college. I had a supply chain internship in Mexico, that was awesome. I just learned so much over there and how underpaid people in Mexico are, unfortunately. I learned a lot about work ethic there. And I also learned that I didn’t want to do supply chain. So then, I switched over to international business because I lived in France. And I got to go to France again, when I was 20. That was an amazing experience.  Through this, I was like, What does International Business offer me? I was going to go the commercial real estate route, I got an internship with that. I knew that firstly, I had to be a financial analyst, and that was a set salary with set hours. I wasn’t really a big fan of that. So I was like, let me do the real estate sales site for six months. And if I don’t do well, then I’ll just go to commercial real estate and financial analysts. But what I loved about it was that it really scared me to the point that, if I do not succeed on this, I’m going to go to the financial analyst, that’s a eight-to-five job, and that I’m earning this salary each month. So that kind of really pushed me to succeed in the real estate sales aspect.

Robert Leonard  41:05

How did you transition from just being an agent to also being an investor? Let’s walk through your first deal and the hurdles you had to overcome to get that deal done.

Andres Bustamante  41:16

Initially, when I graduated college, it was May 2019. I wanted to figure out what I really wanted to do with my life. So that summer, I learned a lot about BiggerPockets.  So I listened to BiggerPockets, and I heard Diego Corzo’s episode, he said he was in Austin, I reached out to him, told him my goals, we got to chat a lot. In the end, he was like, dude, I want you on my team. And I was super excited. So now I’m part of his team. He really helped me understand the house hacking aspect of it.  So my first deal, I would analyze like three deals per day, every weekday.

I’d analyze maybe like 30 deals a week through the BiggerPockets calculator. It helped me understand the house hacking aspect even more. I remember one day, Diego was talking to me, and we were doing my first contract for sales. And he was like, hey, the sales rep for DR Horton just told me that a home got off contract, and you can get this new build home for just $1,000 in earnest money because it’s a new build, it’s not a resale.  So I went the next day, because this was like at 11pm, went the next day, looked at the home and did the numbers very quickly in my head because I already had the experience. And I got it under contract, like 30 minutes after I had seen it.

Robert Leonard  42:39

How much did you buy the property for? And how much did you have to put down?

Andres Bustamante  42:43

The property’s purchase price was $286,000. And I decided to put 10% down. I could have put 3% down though as a first time homebuyer with a conventional loan.

Robert Leonard  42:54

Why did you choose 10%?

Andres Bustamante  42:56

I chose 10% because the numbers made more sense, and also because back then I was like I have plenty of money in the bank. You know what, I don’t want it to be just resting there. Looking back, I could have done 5% or 7%. But I mean, I had the money there. And I was excited. I was like you know what, screw it, let’s just do 10%. And the numbers work even better with that, obviously, because it’s a lower mortgage.

Robert Leonard  43:18

What is your mortgage currently? And what are you receiving in monthly rent?

Andres Bustamante  43:22

So the mortgage is $1850. And my three tenants are paying me $2150. Then looking into vacancy and whatnot, miscellaneous costs, it’s like $220 in cash flow. The fact that it’s a new boat, I don’t really have to take into account cap expenditures, or any big expenses because there’s warranties on new builds. That’s one of the big advantages of new builds.

Robert Leonard  43:46

How did you get your credit score and your credit report ready to buy a property by yourself at just 23?

Andres Bustamante  43:53

So with this, I feel like thankfully, when I went to France, my parents gave me a credit card. So I started building my credit score there. And I mean, from there, I was always diligent about paying on time. I had heard someone say it’s like you need to pay on time, it’s bad to have a bad credit score. I think that just stuck with me lucky enough, because I have some friends that don’t have the best credit score and that really hurts them whenever they’re looking to buy a car or buy a home or anything. So just getting a credit card early on. And remembering that advice–I don’t know who it was. But thankfully, he told me that advice to just pay on time and whatnot. So that was great.

Robert Leonard  44:32

How long did it take you to get your credit to a point where you could actually get approved for a mortgage?

Andres Bustamante  44:38

Well on this I’ve heard that it really takes about five months ever since you get your credit, your credit card and start paying and whatnot. But I mean for me, I’ve had it since I was 17. Through that time I was able to get the credit score to where it was, and also the lender, he’s been my preferred lender for quite some time. [inaudible], I work with him a lot. So it’s a lot about building the relationships with the lenders. And sometimes they can let some things fly and not really as much. But if you have a relationship with a lender that definitely helps to, your chances of getting pre approved.

Robert Leonard  45:14

 Did you only have one credit card building your credit score? Or when you were 17 did you get that one credit card, and then as you neared 23, you added more lines of credit?

Andres Bustamante  45:24

I had that credit card. And then I was also a– I forgot the term, but it’s one year like parents put you on there.

Robert Leonard  45:30

An authorized user?

Andres Bustamante  45:31

Yeah, authorized user. So that really helps a lot, actually. And through that I had an even better credit score through the authorized user, I was kind of riding on my parent’s credit score on everything that they were paying. Their debt to income and the amount of time that they had had the credit card in the bank, which helps a lot. So I have two, two credit scores, and not two credit scores, but two credit cards that would help my credit.

Robert Leonard  45:55

For your second deal. You were considering doing a house hack with your brother, we’ve talked that this deal has changed a little bit from the original strategy, but the original strategy was to go on at 50/50 with a partner, what did that structure look like? And how did you split a primary residence deal with a partner?

Andres Bustamante  46:14

Yeah, so with this, I really, really wanted to get another home, right after I had gotten my primary. And my unfair advantage is that I know the market really well in Austin, and also that I know a deal right when I see one, and that I have leasing experience, so I can get tenants. So I was like who can be the primary resident that can get this home for a lower down payment than an investment property, which would be 20%. Also for a better interest rate.

Well, my brother, he was my renter at the moment. And he had seen the power of house hacking. So I told him, he was set. We legit looked at like two homes. And he was like, dude, I trust your judgment. Got that property. We did 50-50 50% earnest. We were going to do 50% downpayment. He was going to be the primary resident and manage the tenants, I was going to get the tenants for him. So that was kind of going to be our work with that. And on this, I mean, pretty straightforward. Get the tenants from Facebook marketplace, Craigslist, and whatnot. That’s how I usually get mine, or Instagram. And then he would just manage them. I would teach him how to manage them, do the contracts and all that stuff.

Robert Leonard  47:22

Were you going to be on the mortgage as well? Or was it just going to be your brother?

Andres Bustamante  47:26

It was just going to be my brother. He qualified as a primary resident. And because I want to get more rental properties, I didn’t think it was smart to get another mortgage under my name.

Robert Leonard  47:39

And so how did that work out with the lender? How are you able to give your brother money to buy the deal?

Andres Bustamante  47:44

So with this, typically, lenders like to see two to three months of bank statements because they want to know where your money is coming from. So I could have given him the money in hindsight, four months ago. He closed on the home about two weeks ago, and there wouldn’t have been a problem. But if let’s say there was a month before closing, what I would have told the lender, it’s like I’m giving my brother a gift, I’m going to write you a letter to the lender stating that this is the amount of money that I’m going to give my brother. That’s completely legal in real estate, you can just do a gift to whoever you want, stating the money you’re giving them so that the bank isn’t like Dude, where did this money come from? What is this? Where’d you get it?

Robert Leonard  48:21

And then how are you going to manage the ownership structure on the backend? How are you going to make sure that you are legally part of the ownership side of the deal?

Andres Bustamante  48:29

So with this, I mean, since he’s my brother, I completely trust them. I know some people say with family, you still have to do a contract and all. I’m like, dude, he’s my brother, I trust him. If he hadn’t been my brother though I would have had an attorney write up a contract, and 50/50 for each one. If someone decides to sell the property, then you have to pay that person’s ownership first, and then the property can be yours. It was 50/50 50% of the equity paid off and then done.

Robert Leonard  48:59

Walk us through the details of the deal. What type of property is it? Where is it? How much was it? What’s it rent for things like that?

Andres Bustamante  49:07

I love this part. I love doing four beds by three and a half bathrooms in Austin because I know the cash flow like for a fact. Most of these homes I’m getting east of I-35. This is the area in Austin that’s just appreciating like crazy. So with this beforehand, I was doing like four by two and a half, maybe four by twos and then I really found that four by three and a half. That was perfect because three and a half bathrooms. You have a half bathroom for guests. Then you have two other bathrooms that the renters can share rent to share one and then the other renter gets his own.

So that room is charged $750 let’s say. So usually the room that has the bathroom on it’s own is $750 and the other two rooms that share a bathroom are $700. So all in all, that’s $2150 and the mortgage is usually with that. I’ve been seeing mortgages for like $1800 $1900 because of interest rates and then being so low.  It’s pretty simple with that four bedroom structure, once I leave, I’m going to keep renting by the room, and most likely looking at cash flowing with each property like $900, or maybe $1000. And I also know what I can rent the whole unit for. It is important knowing those exit strategies and whatnot. So my whole house right now can be rented for $2000. That’s about $150 in cash flow, which I don’t want.

So what I’m going to be doing is still renting by the room when I move to my next house hack.  One thing that I do love about new builds that I didn’t mention is the fact that you get a home under contract without having to bid. And you can get lender incentives, if you go to the preferred lender, you get like 2% of the home’s value of the purchase price towards closing costs, and also title policy that usually amounts like $6000 to $7000. So then there’s also something known as a 10-2-1 warranty. 10 years of structural warranty, two years of HVAC, electric and plumbing, and one year of craftsmanship. It’s huge. I just love it. But under contract for like $500 to $3000, I’ve had clients put their home under contract for $500. And they ride the wave of appreciation, because with new buildings, usually they take five to eight months to finish construction, or that you get under contract, you don’t get until five to eight months. First of all, that’s flexibility for someone that’s in a lease. And then with that, my second house hack, and believe it or not, it’s I got it at $326,000 under contract, it’s now worth $380,00. And I haven’t closed yet. So that’s like $54,000 in instant equity without doing anything.

Robert Leonard  51:39

Let’s talk about that third deal, you’re doing another house hack. And what I think is interesting about it is that you actually started the process of buying it quite a bit before your one year anniversary is up on your other house hack. Tell us a bit how this works and why you did it.

Andres Bustamante  51:54

On this one, I was just super excited with my first house hack, which I got in April 2020, I can’t believe it’s 2021 now; it’s pretty crazy. So I got it in April 2020. And I was just like, I need another one there. There needs to be another way. So from the relationships I’d build with the new builders, because a lot of my clients have gone under contract with them. I was like, you know what, how about I look for a new build that doesn’t finish construction until April 2021. Because that means I have my full year of primary residence.  In order to get another house hack, you need to have that full year of primary residence in the home, you get the lower interest rates, and you also get to pay the lower down payment. So with that, I learned that there was a four bedrooms by 3.5 bathrooms that was selling in June of 2020 that was not going to be finished until April. So I got it under contract in June of 2020. And I’ve been seeing it being built throughout this time, I should be closing in about two, three months. And I think it’s gonna have like $70,000 in equity. So it’s just huge, super excited about that one. And I already have the tenants for it.

Robert Leonard  53:03

I think house hacks are the most powerful strategy for new investors. So I totally understand why you’re doing them. I actually have a similar story. I’m 25. And I’m on my third house hack right now. With your experience as a landlord and as an agent, why haven’t you expanded out into other properties like traditional rentals?

Andres Bustamante  53:24

On this, I kind of really wanted to just see how it was being a landlord right there. And the rentals for me in the Austin market 20% down the median price in city of Austin is $441,000. So right off the bat, I was like, shoot, this is just so expensive. It was one of my limiting beliefs. It’s like, no, I can’t afford this because it’s going to have to be my money. I didn’t really think of creative ways through that. So with this, it’s more so because of my limiting beliefs that I didn’t do it, and because I was new to the investment game.

Now though, I actually got an investment property under contract about a month ago.  I got it under contract for $1,000 for $297,000. It’s going to be an Airbnb, three beds by two bathrooms. That same home base price is now selling for I believe $332,000. So it’s like $35,000 and appreciation in just one month.  The great thing about this as well is that this is the first phase of that area. New builds usually have phases. So in one phase, they do like 100 homes. Phase two, they do 100 more.

So I mean, single family homes are all based on the comparables approach of what the same homes have sold in the area. So I mean, that price is going to keep going up with the second phase and even more with a third and fourth and fifth. So I’m just super excited for that one. And excited for starting the Airbnb stuff because I’ve never done that.

Robert Leonard  54:50

I struggled with limiting beliefs a bit when I first got into real estate at a young age. What limiting beliefs did you have and how have you overcome them?

Andres Bustamante  54:58

I still have them once in a while. It’s just like, I’m too young or maybe I don’t deserve this. I don’t know, I feel like sometimes it’s the fact that, yeah, I’m not good enough. I think that’s one of the bigger ones that back in the day was pretty big. And now  I’ve learned to control it. I mean, I feel it’s just what you feed your mind being grateful. I’m super grateful for a lot of things. And I know that being grateful for things.

In the morning, I do like three things I’m grateful for. I do my affirmations every morning, visualizations, I feel like having a morning routine really helped me be like, be me on my own time. I wake up at five in the morning, drink a cup of water, exercise, affirmations, meditations, gratitudes, visualize and read it. That me-time really helped me focus on the mindset. And just like small things I’m grateful for, like, Dude, seriously, just being able to see, I take that for granted. Because I’ve always been able to see, you know, or being able to hear or smell and being more grateful for that. Just coming from an area of gratitude has helped me so much. I think if I would have heard myself talking about this, when I was in college, I would have been like, what is he saying? I totally understand why people are crazy about mindset. And I can’t believe how important it is.

Robert Leonard  56:16

Where do you see yourself going from here? What are your long term real estate goals?

Andres Bustamante  56:21

My long term real estate goals are getting $7000 in passive income. Originally, it was 10 properties by the age of 27, each of those giving me enough money to get that $7000 in passive income. Now from talking with people and just kind of letting go of my limiting beliefs. I want to do an apartment syndication. 10 to 15 units in Metro Austin or San Antonio, I’ve  been talking to people. I’m part of a mastermind that does multifamily. David Toupin, I don’t know if you know him. He’s a great syndicator in Austin. That’s my plan– $7000 in passive income so I can be financially free by the age of 26.

Robert Leonard  56:59

What is the best piece of advice you can give a new real estate investor listening to the show today?

Andres Bustamante  57:04

I feel like with this, it’s just to get out of your comfort zone. If something scares you then do it right away. Because it’s just about having unwavering faith over fear. I really believe that something really scares you like real estate investing, start learning about and start doing what scares you. start networking with people. Do the three second rule, don’t think about it count to three and have something done by that time. So just having unwavering faith or fear. That’s very important.

Robert Leonard  57:31

Andres, thanks for coming on the show and sharing your story. I think it’s not only inspiring but also educational. I think a lot of people are going to get a lot of value from it. For those listening that are interested in learning more from you and connecting with you where’s the best place for them to go?

Andres Bustamante  57:46

So you guys can go on Facebook: Andres Bustamante or on Instagram, @andresbustatx, feel free to reach out. I also have an Austin house hacking blog that you can look at.

Robert Leonard  58:00

I’ll be sure to put a link to those different resources in the show notes so everybody listening can go check them out. Andres, thanks so much.

Andres Bustamante  58:07

Thanks, Robert. Appreciate it.

Robert Leonard  58:09

Alright guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro  58:15

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