How to Turn Your Rental Property Profits into a Huge Real Estate Portfolio

Ashley:
This is Real Estate Rookie episode 333.

Tony:
Instead of going out and buying something that’s turnkey, can you identify a property that maybe needs a little bit of love where you can BRRRR that property, still use the medium term rental as your exit strategy, right? Where you’re buying it, renovating it, and then medium term renting it. But now you’re kind of recycling that same initial capital across multiple, multiple, multiple deals. So few options for you if I were in your position.

Ashley:
My name is Ashley Kehr and I’m here with my co-host Tony J. Robinson.

Tony:
And welcome to the Real Estate Rookie podcast where every week, twice a week, we bring you the inspiration, motivation, and stories that you really, really need to hear to kickstart your investing journey. And as always, we’ve got a great story coming up for you guys today. We’ve got Kevin Cullen, and Kevin actually won his way onto the podcast today. We did a raffle for folks that pre-ordered our real estate partnerships book, which if you haven’t picked up a copy yet, head over to biggerpockets.com/partnerships, pick up your copy. But Kevin won a raffle that we did for the book.

Ashley:
So today Kevin tells us a little bit about himself, and he is a real estate investor and he has a dilemma now about partnering with someone. And so he throws some questions at us to help clarify what is the best route for him to go with this new capital he has coming into his hands that he is receiving from investing in real estate. And also he has some potential partners. So we walk through the possible structure ships he can use, and then he also goes through some of the options he has as far as what to do with the capital that he has for himself and for his partners. So if you want to learn about real estate investing or partnerships, this is the episode for you.
So Tony, before we get into the episode, I do have to share something.

Tony:
Confession time.

Ashley:
Yes. So today we’re not doing a review, so if you guys want to leave us a review, we would really appreciate it. You can leave it on your favorite podcast platform. But there’s something that people always say to you and I, maybe they meet us in person or they’re on the podcast with us, and it’s when we’re together and people say, it really seems like you guys have a genuine connection, almost as if they think that it’s fake, our friendship, and it’s just for the podcast.
So I received a note card in the mail, and I’m going to read this to everyone to prove that our friendship is really genuine. Okay?

Tony:
Oh, man. Okay, let’s hear this.

Ashley:
It says, “Ashley, thank you so much for my soft blanky and towels and diaper bin. Mommy and daddy will think of you every time they toss my poopy diapers. I can’t wait to meet you and the boys. Love baby Zia.

Tony:
I love that.

Ashley:
So yes, that Tony’s wife can tell me in a thank you card that they will think of me every time they throw away poopy diapers.

Tony:
Every time we change our baby’s dirty diaper.

Ashley:
We are genuine friends, so I just had to [inaudible 00:03:12]. I really laughed at that. I really enjoyed that card.

Tony:
What Ashley’s reading, Sarah and I sent out thank you cards to everyone who got gifts for baby Robinson on the way. So Sarah got a little humorous with Ashley.

Ashley:
So you’ll have to let her know I really appreciate that. I thought it was funny.

Tony:
And you’ll also be in charge. Auntie Ashley, whenever she’s over, she’ll be in charge of dirty diaper duty.

Ashley:
But you know what? It does mean you guys will be thinking about me a lot.

Tony:
That’s true.

Ashley:
Every time you [inaudible 00:03:44] dirty poopy diaper.

Tony:
That’s true. Well, Ashley, obviously changing poopy diapers is a pretty (censored) situation, but the purpose of today’s podcast is to make sure that your partnership doesn’t end up like these poopy diapers. So let’s get into Kevin’s episode.

Ashley:
Kevin, welcome to the show. Thank you so much for pre-ordering Real Estate Partnerships and winning this chance to come on the show with us.

Kevin:
I’m so excited.

Ashley:
Yeah.

Kevin:
Thanks for having me.

Tony:
Kevin, I think the big question before we get started is I’m sure you’ve probably read the book cover to cover five or six times so far. So I guess just any, because this is my first time being an author, so just general feedback about the book, I’d love to hear it.

Kevin:
I’m going to have to break your heart a little bit. I’m halfway through the book at this point. I was planning to knock it out this weekend. I just didn’t have a chance to. I’m about halfway through. I’m really enjoying it so far. I think there are a lot of really good nuggets, even in the first few chapters, just the things that you can bring to the table and things you should be looking for as you’re looking for partnerships and things like that. So I’m enjoying it so far, and I’m sorry that I haven’t read it covered to cover five times yet.

Tony:
I’m giving you a hard time [inaudible 00:05:02]?

Ashley:
You know what? Before this, that we started recording this I did say Kevin was a dream guest, but I see I jumped the gun.

Kevin:
I’m already letting you down. I’m already letting you down.

Ashley:
So today’s show is going to be a little bit different with Kevin. He’s actually going to be asking some questions to Tony and I. But Kevin first before we get into that, just tell us a little bit about yourself.

Kevin:
Sure. Grew up in New Mexico. Went to school in beautiful Lubbock, Texas at Texas Tech. Originally I went to school for journalism. Spent the first few years of my professional career as a journalist in Nashville and then at the Dallas Morning News. And then kind of transitioned into UX design for software companies and have been doing that ever since. And I’ve always had an interest in real estate. I bought a property, I didn’t really know what I was doing in 2016. It had a cool spiral staircase, so that was the kind of selling point for me. And then so I lived there and then that eventually transitioned into a rental for me. So that started that bug, if you will. But recently just have started more seriously falling down the real estate rabbit hole. My girlfriend had sent me a podcast, I don’t believe it was a BiggerPockets podcast. Sarah Weaver was on it talking about midterm rentals. I believe she’s been a guest on your show before.

Ashley:
Yeah. And she wrote the book 30-day Stay. Yeah.

Kevin:
Yeah. And so I ended up joining her mentorship program and that set me down this path that I’m on now, and I think it just kind of helped continue my research phase. And I’ve fallen in love with the industry a little bit. So I bought my first property that’s an actual investment property this summer in Columbus, Ohio. And so that’s a duplex there. So that’s my first foray into serious real estate investing, I think.

Ashley:
Congratulations.

Kevin:
Thank you. Thank you. So yeah, so it’s been a fun journey so far and I’ve really enjoyed just meeting everybody that I’ve met in the industry. I think that’s a big selling point for me in this world is everybody’s so willing to help and you can just reach out to pretty much anybody and they’ll jump right in and no questions asked. At least that’s been my experience so far. So I really enjoyed that.

Ashley:
I want to get a little bit more background. So both properties, you still have to date the first condo that you bought, and then you have your duplex. And where are you living now? Are you managing these out of state? Do you live near one of them?

Kevin:
So the condo is in Dallas. I live in Dallas. I also have another property. My girlfriend, my mom and I went in on a property that my mom lives in and we midterm rent out a room at that property as well. But the Columbus property I’m managing from afar, self-managing that. That’s at least the plan for now. It’s currently undergoing a pretty full rehab. There was one vacant unit and one occupied unit. So the vacant unit is currently under rehab and there’s tenant in the other, but eventually that unit will be a midterm that I’m planning to self-manage from afar.

Ashley:
And you’re even project managing the rehab from afar, I’m assuming?

Kevin:
I’m doing my best, yeah.

Ashley:
Yeah. That’s awesome.

Kevin:
Yeah, it’s been exciting so far. I’ve really enjoyed getting to know the community in Columbus. It’s got a pretty good investor infrastructure, I guess if you call it. It’s been fun to go into a new market like that, and I had never done that before, so it’s been fun to navigate those waters.

Ashley:
Yeah, we actually had Brin Amberlee on, I don’t remember what episode it was, but she lives in Las Vegas and she has a short-term rental in Columbus, Ohio that she fully renovated and put together too. And then she manages that from Las Vegas.

Kevin:
Yeah, I’ve met quite a few people. One thing that I’ve found quite a bit of success with in terms of just networking generally is as having the condo here in Dallas, I’ve been renting out to travel nurses and stuff as a midterm rental, and I’ve just started reaching out to anybody that posts a unit in Columbus on any of the Facebook groups and just saying, Hey, sadly I’m not interested in renting your unit, but I’m a fellow investor and would love to chat. And that’s opened up a few doors for me, which has been really great and got some intros to some contractors and cleaners and so on and so forth.

Ashley:
What a great way to meet people. No one has ever said that before.

Kevin:
Every person I talk to that’s kind my piece of advice for them because it’s just-

Ashley:
Yeah, that’s great.

Kevin:
… been so fruitful. It’s been great. And then we’ve started a few different groups. We’ll chat on Zoom and stuff, and it’s been pretty great so far.

Ashley:
Okay. Well, Kevin, you are here today because you get to ask us questions even though you’ve already dropped a golden nugget for us all of how to network meet with other investors. So let’s go ahead and get into your questions that you have on partnerships.

Kevin:
Sure. Just as a little bit of background for me, I’ve got some friends of mine from over the years that we’ve kind of always talked about going in on a project together and it’s kind of become more of a real conversation lately as we all get to the point in our lives where we do have a little bit of extra cash to spend and things like that. But it kind of always been something for me where I’m just curious about how to go about structuring that. I’ve listened to tons of BiggerPockets podcasts and things like that and started reading your book obviously, but I think for me, would you say there’s an ideal structure for your first deal like for me, somebody that has a little bit of experience has a few properties under their belts? I don’t know if you have any thoughts on how to best structure that first partnership and how to go about that?

Ashley:
Let’s go through a couple of maybe background questions, Tony-

Tony:
You read my mind, Ash.

Ashley:
Okay. Yeah. So the first couple that I would have are what strategy is this going to be for?

Kevin:
So midterm rentals, buy and hold.

Ashley:
Okay.

Kevin:
Yeah.

Ashley:
And then do you know who would be contributing what already as far as someone’s getting a mortgage or splitting the cash? Do you know any of those details at all yet?

Kevin:
Generally we’ve kind of just talked about it in loose terms. I feel like there’s kind of a decent mix of potential partners that some of them are, I’ll just send you a check and I don’t want to do anything but collect checks after that. And then a few of them are somewhere in between there, I think. But I think for the most part it would be me running the show, so to speak, and then them contributing capital for the most part.

Tony:
So friends are going to contribute the capital, I’m assuming that also means that they’ll carry the mortgage?

Kevin:
We haven’t really gone down that path yet, but that is something that I’ve kind of floated to them and I think that’s definitely a possibility, either that or going like the DSCR route as an LLC or something like that.

Tony:
Sure. Okay. And then in terms of acquisition, deal analysis, you are going to be handling all of that piece?

Kevin:
Yes.

Tony:
And then once you actually close in the property, you’ll be responsible for day-to-day management?

Kevin:
That would be the plan.

Tony:
Gotcha. Okay. And then just ballpark, what’s the, I guess potential investment amount when you think about down payment, closing costs, startup capital, ballpark, what do you think these other partners might have to put into the deal?

Kevin:
It would probably be based on properties I’ve been looking at probably somewhere, if it’s two partners or I guess three total, including me, probably 50k for if they’re bringing the money or anywhere 50 to 75k probably a piece that would also assume kind of the conventional 25% down route. There obviously are other ways to go about that with hard money and such.

Tony:
And then last question for me, what’s the motivation for these other partners? Is it that they want you to bring them along and show them the ropes? You touched on this a little bit, but just so I can make sure that I understand. Is it that they want to learn this space as well, or is this more so just another vehicle for them to get a return on their cash that’s better than leaving it sitting in the bank right now?

Kevin:
I think there’s probably a good mix of the two of those. I probably have one or two other people that are more interested in the being brought along kind of process that have different skill sets that they can bring. But then there are two that are probably more on the side of, no, I just want my money to make money. I think it’s a good mix of two, but without much experience from any of them already, if that makes sense.

Ashley:
Tony, I think we’re going to have the same answer as far as the setup, the structure of it legally, and I’m going to say joint venture, would yours be the same, Tony?

Tony:
I think that’s probably the easiest way to go. So when you think about the deal, Kevin, when you think about the partnership first, I guess to kind of take it back, to answer your initial question, no, there’s no ideal structure for your first partnership because a lot of what’s ideal is going to vary depending on those questions that we just asked you. How you bringing the capital stack, who’s getting the mortgage, who’s doing acquisitions, who’s going to manage it? I think the thing that’s important to remember, and this is for all of our rookies that are listening, is just because someone’s bringing the capital doesn’t necessarily mean that they have more leverage in the partnership, especially if the person bringing the capital, if they have the option of choosing between leaving it in a bank and losing money to inflation or putting it in the deal with you, you’re offering them a better solution.
So you’re truly doing them not a favor, but you’re doing them a positive service. So I think that’s the important thing to point out. I’m going to try not to go too much off on a tangent here, Ash, so reel me back in if you need me to. But I think the first thing I would do is say, okay, if Kevin’s going to be managing the property and you’re doing all of the acquisition, you’ve got a few different ways you can compensate yourself. You can either do it by charging the property, some kind of management fee. So you can say, Hey, I’m going to take, going rate for the short-term rental spaces between 15 to 25%, somewhere in that ballpark, and I’m going to charge the property X amount. And you can say, I’m also going to maybe take a small equity piece for doing this as well. So maybe say, Hey, instead of 15% I’m going to charge 10%, but I’m also going to keep 20% equity. So that’s an option.
Or you can say, I’m not going to charge any property management fee at all and I’m going to take 40% equity in the deal for managing this longterm. So I think that’s the kind of first idea or decision that you need to make.

Ashley:
Yeah. And that goes along with what your goal of this is that you want cash today, you want more cashflow, and that’s where it’s going to be kind of nickel-and-diming for each of those roles and responsibilities that you’re doing. But also thinking about down the road, are you going to want to be the property manager forever. If you’re not, and one day you say, I don’t want to do this anymore. And your partner’s like, well, we gave you 20% equity because you were doing that, now you don’t want to, and you just get to be a partner and do nothing now. Well instead you can say, well no, I’m going to give up my 15% management fee and we’ll use that. That’s going to someone else. I’m just not getting that anymore.
So weighing that out as to what kind of ownership do you want for that long-term gain little cashflow now hopefully every month the properties performing, you’re getting cashflow, but also down the road when you sell that property, you own that 20%. So weighing that out, what’s more important? Do you want more equity and maybe charge less of a management fee? The only thing that I would be cautious of is that make sure it’s not too low of a management fee where when you do step away, that 8% you’re charging won’t compare to now the 20% you have to charge to hire someone else. I think it’s definitely a fair to not charge an outrageous amount as a management fee, but you don’t want it to be a huge shock, or at least when you’re analyzing your deal and running your numbers, you’re putting in what the actual going rate is for property management to make sure that if you do step aside, you still will make the cashflow that you want to and the extra that you’re providing right now is just bonus that each partner gets to make.
And then as far as the acquisition, you could always charge an acquisition fee. So I’m bringing the deal. A lot of people that do syndications, they actually charge a big fee because they acquire the property and they also take ownership of the property, and some put money into the deal, some don’t. They’re just getting that because they found the deal. So really thinking about that too, would you rather take more equity for that long-term play or would you rather take a bigger acquisition fee now and get less equity too and weigh out those options? So the first conversation you need to have with your partner is what is their goal of this? What Tony had mentioned this earlier as to do they want cashflow? Do they want to invest long-term and they are planning for the retirement? What are some of those motivators for them?
And then you can kind of almost like you’re negotiating with a seller buying a property, you can say, okay, well I really just want to increase my net worth and I want to have equity in this property. I want to have as much ownership as I can with putting as little amount of money as I can into it and then write that number down, be like, here’s what it would be worth for me to do. Here’s the percentage to manage it, that it would be worth it. So make sure that when you’re saying, I will do it for 15%, that you value your time and you know that it’s going to be worth it and you’re not going to dread it and you’re not going to resent your partners because you’re doing all this work and not making a ton of money and they’re making a ton of money doing nothing, just being passive partners of the deal.

Kevin:
Yeah, I think that’s certainly something that when we first started discussing this, I think the assumption was kind of we would all just bring money to the table and then it would be a partnership, and then that’s how we would go about it. And the more that I’ve learned and delved into this industry, that’s kind of opened my eyes a little bit to like, oh, there is value that you can bring to the table without having that money piece coming with you as well.

Ashley:
Yeah, and I think that’s the biggest thing is just sit down and make that, okay, here’s the amount of money each person is bringing, and obviously that bears weight, but also the debt, who’s getting the mortgage in their name, especially if you’re doing a joint venture agreement? Then also list out the roles and responsibilities. So not only the property manager, but also is someone going to be in charge of the dispo of the property. Say you are going to sell the property in five years, that’s the agreement. Who’s going to be in charge of getting the real estate agent? Or is one of you going to act as the agent? Are you going to sell it off for sale by owner, off market, all these things? Who’s going to do the bookkeeping? Whose tax preparer is going to handle everything because you have to send that tax repair the information and then get the taxes back, distribute the K-1s.
And for my partners, that’s my job, and I get so annoyed when they message me and say, Hey, can I have my K-1? And I repeatedly tell them, this is when you are going to have it, and don’t worry, it’ll be in plenty of time before you have to do your taxes. And then if they ask me a third time, I’ll say, would you like to do this? Would you like to be in charge of getting the information from the bookkeeper, giving it to the accountant and then distributing it? And they say, no, no, no, I’m good. But there’s so many little nuances like that you don’t always think of, and that’s where you’re just sitting down pen and paper, writing out every role and responsibility for the business and then dividing it up that way.

Kevin:
And how would you go about, I mean, you just went through a pretty long laundry list of things to consider. Is there any way that you would approach making sure that all your bases are covered from that perspective, whether it’s a checklist or et cetera? How did you learn what needed to be done and things like that?

Ashley:
Yeah, so going through and just looking at any business, I mean you just Google how to operate a business or whatever things that are done with it, but we could kind of go through a checklist right now, Tony, if you wanted.

Tony:
Yeah, for sure. Before we even go through the checklist, if I can just comment, you asked the question, how did I learn? How did Ashley learn? For me, initially it was trial and error, right? Where it was like we did our first partnership and then we realized all the gaps or things we had forgotten and we said, okay, next time let’s make sure that we fixed for that. And then we did it again and we was like, oh, there’s still things that we’re missing. Then we did it again. Oh, there are still things that we’re missing. Eventually we realized why don’t we just sit down with our attorney, someone who’s done this a thousand times, walk through kind of what our ideal situation is, and then allow her to poke holes and ask this question and that question. And once we have that conversation with her, that’s when I feel like we were really able to tighten things up.
Because an attorney, especially if you get the right attorney, they’ve seen a thousand different contracts and they know what some of the kind of sticking points are that maybe she’s seen one partner sue another partner over so they can help you get in front of those things. She was one that actually gave me the recommendation to have a term limit for the partnership. So it’s like a five-year term for all of our partnerships now, and we all have to sell unless we all agree to extend.
She was one that made me think about what happens if someone dies, what happens if someone gets divorced, what happens if one of you wants to sell? Those are things we’d never even really thought of before. We were just thinking more so about the structural component, but your attorney, they’re always trying to think about the risk and the risk mitigation and what happens if things go wrong, how do you solve for those things upfront? So for me, a lot of it was trial and error with those initial partnerships, but then really forming a partnership with my attorney to say, Hey, here’s our goal. Help us understand what the risk and maybe where we’re missing things.

Kevin:
I think that’s the daunting part is figuring out which part to do first, like do you go to an attorney? Do you go to an accountant? Do you find the deal first? Do you get to finance it? And I think I’ve seen this in various different avenues on BiggerPockets or wherever where that’s the barrier for entry to a lot of people. I think for me it can seem like so many moving parts, it’s hard to know which first step to take. So I really appreciate you saying that.

Ashley:
I think you’ve already done the first step, you already have potential partners, so you know that if you do find a deal that you have options. And I think so next I would say would come the deal and then would come the attorney, because depending on the deal, your structureship may change because of the deal. So the way you’re going to fund it, maybe this property that you’re purchasing, they’ll do seller financing, so nobody even needs to go to the bank on that. And then you can go to the attorney. But even before you go to the attorney, make these lists of things of like, okay, Kevin, you know you want to do these things. Your other partner knows they want to do nothing. Your third partner knows he actually has a great CPA, he wants to be the contact person for the CPA and hand those stuff back and forth.
And for anything you don’t think of, because like Tony said, we didn’t know all of this. We’ve just accumulated it from running different businesses and different things. You just start to pile all these things on, but you can always put something in your joint venture agreement to cover unexpected tasks or roles that come up. And it could be just something as simple as to if someone has to do something that is outside of their scope of work for managing this project or whatever, it’ll be an hourly rate of $20 per an hour or whatever it could be. But also you could put a list of general ideas. So if this is something that falls under an admin care category, this is something that falls under maintenance.
So maybe you have to replace a whole HVAC system and you guys want to get bids on it. Well, someone says, well, who does that? Because usually I just make a phone call to a handyman. Now you want me to go out, build a scope of work, bid out the HVAC to be done for these three units, whatever it is that you have, anything that falls under maintenance is kind of under their realm. And then categorize it out like leasing, property management, capital expenditures, however you want to list out those categories. So if something you don’t expect comes up, the person who has to take care of it, whatever category they were assigned to too.

Kevin:
Awesome. Yeah, that helps clear up a lot of things. I think that it’s truly the more daunting piece of it is figuring out those moving parts. And I appreciate the insight for sure.

Ashley:
And remember, as long as you’re using a legal structure, there is nothing wrong with it. So someone could give you $100,000, you could go buy $100,000 property and you could own 90% of it and they could own 10% of it because you guys agreed on it and that was fine. So as much as we’d love to say, okay, Kevin, you should take 20%, your partner should take 30, and then the other person 50, that’s what you should do. It’s hard to say that because you could negotiate something better than that 20% we’re saying.

Tony:
I think just one last thing to add to the partnership piece or to the structure piece is that’s why I think it’s best to test the waters on a new partnership. And you can test the waters in few ways. You can do it by investment size. So it’s such a small investment that even if that partnership went super south, you wouldn’t really be impacted by the amount of capital that you lost. Like in your situation, if you’re not putting up any capital, you could say, Hey, I’m really not happy with how this partnership is working out. I’m going to give up my equity in this deal and I’ll let you guys take it from here. And that’s one way to do it. You can do it by time duration, which is why I talked about that five-year time horizon. If it’s a hold property, you could do it on a short-term rehab project or maybe something else that’s kind of time constrained.
But I think what some people fail to realize at times is that they can readjust or restructure the partnership if needed. And it’s good to kind of have those alignment meetings with your partner to say, Hey, where’s this partnership headed? Are the assumptions that we made at the beginning of this partnership still true today? I thought that I was going to be putting in five hours a week. Well I’m really putting in 40, right? There’s an imbalance here. And do we need to kind of account for that? So the partnership structure that you start with today, assuming you have a reasonable partner, if you came to them and said, Hey, our initial assumptions aren’t lining up with reality, and I think in order for this to continue to be fair, we need to readjust things, hopefully someone that’s reasonable would be open to having that discussion as well.

Kevin:
I’m going to go ahead and assume the answer is yes to this, but do you have any horror stories where that didn’t happen?

Tony:
Where I approached a partner and said, Hey, we need to restructure this, and they said no?

Kevin:
Yeah.

Tony:
No, it’s never happened to me. I’ve only had to restructure I think a couple of partnerships and both times it, I think both sides were kind of fighting for what made the most sense for them, but at the end of the day we came to an agreement around, okay, cool, we all feel good with this new structure based on the reality of what’s going on. And hopefully you can suss those things out from someone before you even get into a partnership with them. And if you’re feeling kind of weird about would this person be flexible if we needed to change this? And you’re like, I don’t think so. To me that’s a red flag upfront of like, do I even really want to work with this person long term?

Kevin:
That’s a great point.

Ashley:
For me, I never had to change an existing partnership, but with a partner, we had an LLC and we had a couple properties in the LLC and then I got this other property under contract and I didn’t like the structure of our first partnership. I thought that I was putting in a lot more for this new one, so instead of changing our current LLC, we just opened another LLC where the first one we were both 50/50 and in this new one I was 60 and he was 40. So we kept everything existing the same and then just going forward, things that we put in there was 60/40 instead too, which he was fine with and it was all fair and everything and it worked out well because we still didn’t have to change anything that was done in the past that was done evenly 50/50.

Kevin:
Is that typically the cadence that you see with your partnerships that you’ve had where you do start out with the joint venture and then eventually it makes sense to move into an LLC and structure it out from a percentage perspective like that? Or is it just kind of a mix depending on the situation?

Ashley:
So for me, I’m doing multiple deals with each partner. Well, first of all, the first LLC I started with a partner. I didn’t even know what a joint venture was. I think my first job ever, I remember seeing a sign on the door that a joint venture owned it or something. There was a sign of the kitchen. I was like, I don’t even know what that is. Are they venture capitalists? I thought it was about raising money or something. I had no idea. So I started an LLC because my mentor, he used LLCs on his properties, so I didn’t know any better then. But then as I continued on, we are holding our properties, we don’t really sell anything. And it just worked out that I’ve had the same three or four partners and we’ve just kept everything in the LLCs we own together and done it that way. And then Tony, you’ve been almost the complete opposite of me.

Tony:
Yeah, the majority of my partnerships are just kind of one-offs. So they’ve all been joint ventures. We have a couple entities that are actual partnerships where we have shared ownership in the LLC themselves, but I think if it’s just one deal better easier to just do it as like a JV between your LLC and that person’s LLC. And then if you guys decide to do multiple deals together, then maybe structure one that’s kind of all of you sharing ownership just because it’s little bit easier that way.

Ashley:
And also the strategy too. The joint venture I actually did was a house flip and I partnered with an experienced flipper and we did a joint venture agreement with that because it wasn’t going to be long-lasting. And in some states it’s so expensive to even open an LLC and if you’re only going to use it for a year when you’re doing the house flip-

Tony:
One time.

Ashley:
Yeah. It’s not worth it at all. So that’s definitely another thing to consider what are the LLC fees?

Tony:
Quick side note, I started an LLC together with a friend of mine for us to start wholesaling and we only did two deals together and I was still paying, this was back in 2021 I think is when we did our last wholesale deal. And I’ve still been paying QuickBook fees, our $800 fee for California and my attorneys to file these tax returns for a business that was doing zero activity. And then this year I got the bill for my CPA for filing the taxes. I was like, can we please just close this out because we haven’t done anything in two years? Why am I still paying anything for this entity? So it can get pricey to Ashley’s point if it’s not something that’s going to be consistent with that person.

Kevin:
Gotcha. Yeah, I think that’s another kind of daunting thing. And I mean this is talked about ad nauseum on the BiggerPockets podcasts and where there’s so many different ways to structure LLCs, like LLCs within LLCs, and there are so many different thoughts out there about how you should properly, properly structure either a partnership or even just your own deals. And I think that’s a pretty daunting task to try to look at in terms of how you structure your business too.

Ashley:
And I think as far as that, that’s the point where you’re consulting an attorney as to, because you’ll hear people having holding companies and holding companies, they have the LLC that holds different rental properties and they have their active flipping business as another one under the holding company and setting up that kind of structure, that’s all where you need to go to an attorney to help you, but not only an attorney, but also a CPA too and have them coincide with each other as to what suits you personally, if you need to put things into a trust for your kids, all those different things. But as far as just setting up that first LLC or that first joint venture, not even your first one, but as you’re doing that, but if you are going to really grow and scale, that’s where you want to consult an attorney to actually set up those different layers of protection that you’ll have.
So we actually had an attorney on episode, I can’t think of… That was Brian, wasn’t it, Tony?

Tony:
Yeah, I can’t remember the episode number either. Maybe our attorneys. Maybe our producers can help us out. We will drop the episode number here, but it was a two-parter.

Ashley:
Brian Bradley.

Tony:
Brian Bradley.

Ashley:
Yeah.

Tony:
105 through 106.

Ashley:
Yeah. Yeah.

Tony:
So you guys can go back and check that one out. But it was one of our better performing episodes and it was all about asset protection as a real estate investor. So if you want to borderline scale yourself out of being a real estate investor, might be a good episode. But also if you’re looking just for that asset protection piece, it’s a good place to look.
So Kevin, we spent a lot of time I think answering that first question. Obviously Ashley and I can talk for days on end, but I know you had a few other questions for us as well.

Kevin:
Yeah, sure. So this one, I’m pretty, it’s kind of bittersweet. I’m selling my first property that I purchased, my condo we’re scheduled to close in about a week, which is exciting. It’s the first property I’ve ever sold.

Ashley:
Give us the numbers on it real quick. Why the excitement?

Kevin:
Well, so I purchased it for 140 in 2016 and it’s under contract for 287.

Ashley:
Wow, awesome.

Kevin:
Yeah.

Tony:
It’s amazing.

Ashley:
Did you have to do any major rehab on it or anything? No. Wow, cool.

Kevin:
Nothing. I mean some paint and whatnot.

Ashley:
Yeah, that is super exciting. Congratulations.

Kevin:
Thank you. But from that, I’ll walk away with about 170k in cash. It was my primary residence for two of the last five years, which is nice. No tax maneuvering that needed. And so one thing I’m just curious is if you were me just starting, at least seriously starting in real estate and you had that, I don’t know, whatever you want to call it, war chest purse, to go out and jumpstart your career, knowing what you know now, how would you structure that? How would you go about that? And with knowing what you know about me and my strategy that I’ve been approaching Columbus, Ohio with?

Ashley:
How much time do you have on your hands? Are you super busy or do you have time to be the active investor?

Kevin:
I have a good amount of time. I mean, I have a day job, but I have a good bit of flexibility.

Ashley:
Flexibility. I was just kind of wondering on that as to maybe if you were super busy, you really didn’t have time to go and research properties, just even putting it into a syndication deal so that you have some kind of, what’s the word I’m looking for, Tony? Your portfolio. You’re diversifying. You’re diversifying your portfolio. But if you are active, I would say just from what I know is to actually take that money and use it for down payments on different types of properties. So if you’re going to be doing your partnerships, say there’s three of you, you can buy multiple properties now because you could take that a hundred thousand and say, now you can buy, you have enough to put in your portion of the down payment for three properties or whatever that may be. But I would say to spread it out.

Tony:
I think that’s great advice, Ashley. Kevin, what’s your ultimate goal? I guess with your real estate investing? Is it to generate a ton of cashflow in the short term so you can potentially do this full time or are you looking more so to subsidize retirement two decades or however long down the road?

Kevin:
I would like to replace my W2 income, so I kind of become work optional. I have a great job. I’m not in a rush to quit my job, but I’m not pulling my hair out every day. But that is the goal to sooner than later replace my W2 income and be able to do this if I wanted to.

Tony:
So there’s a few strategies that you can go after. We had Coach Chad Carson on not so long ago to talk about his book, the Smaller Mighty Investor, but it’s like how can I generate the highest amount of cashflow with potentially the smallest number of units possible? And you’re already kind of venturing into that space with the medium term rental. So it’s like how can you double down on that strategy specifically given your unique skillset? So if you’ve got 170,000 bucks, there’s some ways you could really make that stretch to give yourself the best chance of generating the highest amount of cashflow possible.
So one example could be instead of you going out and purchasing a ton of properties, you can go the arbitrage route where you’re looking for properties in these markets that you already know and you’re subleasing these out, and it’s going to be a fraction of the investment because… I just got three arbitrage units for I think my total out-of-pocket expense was like, I don’t know, 5,000 bucks to secure the leases for all these, and I think we’re going to spend maybe another 5,000 or 6,000 across all three units to get them furnished.
So I’m all in for less than, what is that? 10 grand for three arbitrage units. And imagine if you keep those same economics with $170,000, you could set up a ton of those units, midterm rent them with a strategy that you already know, and then you could be crushing it with $170,000. Now if you want to balance that out with the ownership piece as well, because maybe that equity is important to you, then yeah, I think Ashley’s idea of spreading that across multiple properties. But what I would even possibly consider doing Kevin, is instead of going out and buying something that’s turnkey, can you identify a property that maybe needs a little bit of love where you can BRRRR that property, still use the medium term rental as your exit strategy where you’re buying it, renovating it, and then medium term renting it. But now you’re recycling that same initial capital across multiple, multiple, multiple deals. So a few options for you, if I were in your position.

Ashley:
Especially if you do it with your partners or whatever, and say, altogether the three of you could have 250,000, if you could find a market where that price point is available and you just keep buying with the cash you have, you’ll be so much more competitive than other buyers because you’re not having to get financing, you’re not having to deal with a hard moneylender than you go in and you renovate it and then you refinance it and pull that cash back out and you just keep using that over and over again. And that was part of the reason that I was able to grow and scale in 2017 so fast because I found BiggerPockets and I found, oh my gosh, you can get a line of credit on a property, and I would just use my line of credit over and over and over again, and it was so much easier than having to try and figure out how to pay for something because I would just use those same funds over and over again.

Kevin:
Yeah, I think that’s certainly something that I’ve been wondering. I think I go back and forth on it whether to try to go the cash route or try to do four hard money properties at the same time and do that. I think that might be kind of a mental block or two. It’s like figuring not making a mistake with that money.

Ashley:
I mean, ultimately it comes down to the numbers, to be honest. So look, I don’t want you to have… You’re overwhelmed looking at properties because you’re like, well, at this point that I can buy cash, this price point, I can do down payment. Now I need to find three properties like that. And it kind of expands your buy box, which takes up more of your time and you’re not as efficient and effective at analyzing properties. But take your two options of, okay, here’s a property I could buy in all cash, run the numbers. What’s your cash on cash return on it? What’s your cashflow? Can you guess at any kind of appreciation in the area? Are there any market trends showing that it’s going to appreciate? And then take the three other ones that you put down payments on or something and analyze those and in five years, what’s the outcome?
And then even look at your cash on cash return in the first year and just compare all of the numbers. And that may even give you a better answer than Tony and I can, because you’re looking at the actual facts of the property on paper, and that’s really the best route to go as to where you’re going to best return. The only thing is that it’s so easy to get caught up in that analysis paralysis that you never take action because it’s better to not get the best option and to get something that’s good but not as great as something else because you’re still taking action, you’re still moving yourself forward. And that’s something I see a lot is people have that $100,000 and they don’t know which is going to be the greatest return they can get. So they actually never even do anything with it because, and then they just sit on it because they want to maximize it, which I totally get, but taking a little action is better than no action.

Kevin:
I think that was kind of the thought process I took behind my first deal in Columbus. It probably wasn’t the best deal, but I did want to get started. I didn’t want to get stuck in that analysis paralysis phase. And I think I try to preach that as much as I can at this point. But I definitely agree that there’s something to be said for the action piece of things and not just kind of sitting back waiting for that perfect deal. Because seen even just in my short time being more immersed in this world, I’ve seen a lot of people do that already and it’s something I didn’t want to fall into, and I definitely don’t want to fall into that with this next step as well.

Ashley:
And you have amazing opportunity. You have options. You are going to have this lump sum of cash. You have people that want to partner with you, you have experience. So you’re ideal for a hard money lender. You are in a great position as to having all these options of how to buy a property. Awesome. So Covenant, in the last couple minutes we have here, do you have one last question you want to ask?

Kevin:
Sure. This is kind of something that I haven’t delved too far down the rabbit hole on, but just where and how you find off-market deals, where you found the best success. If you have any advice for the first avenue to take with finding off market deals, that’s kind of one of those things where there’s so many different avenues it seems. And I would just be curious to hear your insights on how you’ve found the most success and what you think a rookie investor, what avenue they should take, maybe that first step.

Ashley:
So I think two that everyone should be doing. I don’t think that everybody should go out and do every single option because it becomes overwhelming and you should focus on one strategy of sourcing deals. But there are two that are super easy to do that everyone should be doing, and that’s telling anyone and everyone what you are looking for. Because word of mouth referrals have been some of my best deals. And those they’re like freebies. All you have to do is talk about real estate and then someone says, Hey, my cousin wants to sell their house. And then you make that connection. You don’t have to pay for it, you don’t have to do anything. So telling anyone and everyone about what you are looking for. And then also the next thing is just making connections with real estate agents for pocket listings.
These are listings that somebody has talked to the agent about selling their house, but they haven’t put it on the MLS yet. Then the agent may come to you and say, I have this property. It’s not going up for market. You can have first dibs at it. And I’m actually closing on a property on Friday that happened with that. It didn’t go on to the market. I told them I’d pay what they were asking before they did, and we agreed and we signed the contract and never actually hit the MLS for that bidding war. And that was just from making connections with real estate agents. And that didn’t cost me anything, and that didn’t really put any work in at all either.
And then the third thing that I have personally done that worked really well for me is a direct mail campaign is going and pulling a list. I used PropStream and then from there we were looking for waterfront property, lakehouses at the time. So that’s what we set our criteria at. And then we did it, I think under 1500 square feet because we knew we couldn’t afford anything more than that to purchase, but I just set at least two bathrooms, different things like that we put on there. And then we did high equity in the property. That was another filter we had put into it, and then we did a mail campaign and sent out postcards to everyone, and that was my most successful off market sourcing deals as to the amount of responses that we got.

Tony:
Yeah, I think a lot of my experience kind of echoes what Ashley said. The relationship piece has been pretty big for me with realtors. That’s how we found quite a few of our off market deals. Let’s say the majority of our off market deals have come from just friendships that we’ve built with agents in the markets that we work in. And if a buyer falls out of escrow or if there’s a property that maybe the seller wants to keep it a little bit more low-key, whatever the reason is, we found quite a few deals through relationships with agents and then also just working with wholesalers. If you go to your local real estate meetup, chances are there’s at least a small handful of wholesalers that are there. And if you just get up in front of the mic or whatever, walk around and introduce yourselves to people.
Say, Hey, I’m looking for these types of deals in these markets. A lot of times these are newer wholesalers too at these meetups, so they’re hungry for buyers and a lot of times that’s why they’re even going to these meetups in the first place. So I think just networking in your local area is a good place to find those off-market deals as well. And then we recently had Nate Robbins on the podcast. If you go back to episode 326, Nate does an incredible job of breaking down how he sourced tons of off market deals for his business. So episode 326 with Nate Robbins. But yeah, Kevin, I think all those strategies are ones you can kind of put into your tool belt and kind of use as needed. Awesome.

Kevin:
Do you have any advice on that first off market deal to avoid the fear of the unknown, I guess?

Ashley:
What do you mean? What part unknown?

Kevin:
Just not having, say it’s with not with a real estate agent and you’re kind of doing it on your own, that safety net is gone, so to speak. Do you have any advice for getting past that, I guess?

Ashley:
I think it’s an advantage because you get to talk to the seller directly and focus on that because you can still do an inspection, which your real estate agent doesn’t really inspect the property with you as far as things that are wrong with it. You can still do that. Then as far as the contract in New York State, you have to use a real estate attorney anyway, so my attorney does the contracts. And Tony, I think you’ve had your title company do a contract for you before.

Tony:
Yeah, yeah, yeah. My title and escrow company does it for us.

Ashley:
So that would kind of cover your base. Is there anything specific you’re thinking of?

Kevin:
Not specifically, just kind of generally. It can seem a little daunting.

Ashley:
The handholding?

Kevin:
Yeah.

Ashley:
I think just think you’re cutting out the middleman. I love real estate agents. I hate doing paperwork. I love everything that they do for me. But also when I am direct with the seller, I get to find out their motivation. I get answers straight from them. It’s not going from them to their agent to my agent. Then to me it’s like playing telephone. Things sometimes get misinterpreted. So I think of all the advantages of going direct to seller that you can have.

Tony:
I think just one last thing, and this is just for everyone that’s listening. If you do go off market, still use some kind of intermediary to handle the cash. So I’d never send money directly to a seller for an earnest money deposit. If you’re working with a wholesaler, I would never send cash directly to a wholesaler for your earnest money deposit, send it to escrow, let escrow make sure that all the paperwork is filed correctly. That way when you buy the property you know that you’re actually buying the property. Because I had a friend of mine who bought a property or was in the process of buying a property, and turns out that the previous transaction wasn’t done correctly. So there was actually someone else who had a claim to the property. The person he was trying to buy it from technically didn’t even have the right to sell it to him. So just make sure that you have your I’s dotted and your T’s crossed and your title and escrow company can typically do that for you.

Ashley:
And when Tony says escrow, that basically is a bank account that’s managed by a third party intermediary, such as an attorney or the title company that will hold the funds until both parties, you’ve closed on the property or whatever the agreement is in the contract. And then those funds will be released. So even if you close on a property, I had a property where there was $3,000 that held in escrow after we closed on the property. If the tenant didn’t move out when they said they were going to move out, I would have to forfeit those $3,000 to the buyer to pay for attorney fees to file an eviction. Luckily, the tenant did move out, so I got my money back. But that’s just what Tony means. It’s just an intermediary holding the funds in a bank account and having it released upon the terms of whatever the contract does. Well, Kevin, thank you so much for coming on the episode today. We really appreciate you taking the time and for checking out half of our book Real Estate Partnerships.

Kevin:
Thanks for having me. I think this was awesome. I think you guys provided a lot of very actionable items, so I really appreciate you taking the time and having me on.

Ashley:
Yeah, and congratulations on all your success so far. I am glad that we got to have somebody on that has a little bit of experience to share their journey too. That was interesting to learn about.

Kevin:
Awesome.

Ashley:
Okay. Well Kevin, please let everyone know where they can find out some more information about you and reach out to you.

Kevin:
You can find me on BiggerPockets. I’m Kevin M. Cullen on pretty much every social platform, I think except Facebook maybe, but Kevin M. Cullen on Twitter, Instagram. Not that I post often, but I’m on there. But yeah, BiggerPockets probably the best. I would love to meet and chat with anybody. Meeting people is one of my favorite things, so please reach out and let’s chat.

Ashley:
Okay, awesome. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson, and we will be back on Saturday with a rookie reply.