How to Scale a Rental Portfolio with $0 by Finding Overlooked Sellers

0:00Like let's say you're a flipper, right? So let's say you you want to start, hey, I love doing flips and you know there's a lot of great flippers that I know where it's like you I have one flipper tell me it's like yeah like I love the money. I love the profit but I just love the fact that I'm able to build someone's dream home, right? And I'm like dude that's cool, man. That's awesome. You know that's that's amazing. But you know like if you're a flipper, right? Like my thing I always tell people and it's like whether you're a flipper, whether you're a buy and hold guy, whether you're a multif family guy, whether you're a self-s storage person, or whether you just start a business, even even as an entrepreneur, you need to understand unit economics as in what is the economics behind your supply and demand.

0:39So, if you're a flipper, okay, like one of the things I tell people all the time is depending on the market you're looking at. All right. Well, have you done the due diligence on how many permits were pulled to build the same amount of products that you're looking to associate with? Right? So, if you're look, you know, if if you're a buy and hold guy, right? Because I I coach mainly people who want to do multif family buy and hold and you know most of my students go after the 8 to 50 unit multif family buildings and I ask them all the time okay like if you're investing in I don't know like Davenport Iowa great like have you done the unit economics of the supply and demand behind Davenport Iowa because you know you could take it from a macro level of understanding stuff like fiscal policy monetary policy the Federal Reserve interest rate, right?

1:27Reserve reserve banking requirement. Like, you can do all that and that's great. But, you know, as you and I know really well, real estate is a local strategy. It's all about what's happening locally. So, if you know, one of the students of mine is like, "Hey, I want to invest in an 8 to 50 unit." Great. Well, I I hope if you're doing deals in Davenport, Iowa, that you pulled permits on what's scheduled to be coming in terms of new inventory over the next 12 18 months. I hope you've done research on what the absorption rate typically is for threebedroom, two bath, two-bedroom, one bath, onebedroom, one bath, like whatever the unit count that you're looking for.

2:02I also hope you you've done enough research in terms of what's been the transaction volume in Davenport, Iowa for the exact type of strategy that you're looking for. So, you know, if I tell like if I'm talking to a beginner real estate investor, like here's what I would tell them is like spend the first like 120 days to six months learning everything you can about different strategies. Find one that you really resonate with. Then spend the next 90 days learning a whole lot about that particular strategy. Choose a market. First option being local and then network with as many people as you can that relate to that particular strategy.

2:35So for a lot of my clients, it's property managers. It's, you know, lenders, right? It's attorneys who handle evictions, right? And learn as much as you can and then get to the specific economics like what we're talking about on what makes your product successful, what makes your strategy successful. If you do that, you'll oftentimes find these little niche things that you'll be able to do your first solid five to 10 deals and make a good amount of money because when you're doing your first deal, you don't get the stuff like so for example like our group, right?

3:08So me and my other GP partner is a property manager. We have the advantage of whenever we look at deals, if it's a 30 unit or it's an 80 unit, we have the advantage of seeing the ledger, right? Seeing the P&L, seeing the T12 report, and we have the advantage of being able to add 6% property management back into our NOI because we do our own in-house management and we're typically better operators than 90% people out there. So, we we have that advantage, but when you're first starting out, there's not a whole lot of advantages that you have.

3:39Unless you're managing it yourself or you're doing the work yourself as a maintenance guy, there's not a whole lot of, you know, advantages that you have. And oftentimes where you find the margins that's wide enough for you to make mistakes as a rookie. It's oftentimes in these really, really niche deals. Got it. Yeah, that totally makes sense. And for you when you were first getting started, so that the the title of your book is 0 to 75 units in one year. That's huge growth in one year.

4:11You know, most most people I talked to don't accomplish near that in in their first year. So, I guess what was it that you guys did different that that led to this amount of success? And also, were you worried at the time growing that fast? What if this doesn't work out? But we're putting a lot of eggs in one basket here. Yeah. Yeah. So, I I was foolish enough to never think that it was not going to work out, right? Because I I had very much what you call the youthful optimism where it's like it's kind of when you hear an 18-year-old kid, you ask them what they want to be and they're like, I want to be a millionaire.

4:46Yeah. Right. And you're just kind of like, okay, kid. Like, you know, you got to you got to understand the real world first and how that works. But so, I had like a lot of youthful optimism. So I struggled like I tell people all the time even in the book like don't be fooled by the title because yeah like I you know we we got 87 doors in one year but what people don't see is the three years beforehand where I just struggled right because I had three years of listening to every podcast reading every book buying every course and being part of every coaching program but I wasn't able to do a whole lot of deals like I just it didn't pop for me and because I was doing a lot of the same things that we were talking about.

5:26It's like talking to like working primarily with brokers and just going on Zillow and Loopnet and just trying to put in offers, right? And like it bothers me when people are like, "Oh, it's a numbers game, right?" because I mean, yes, I I get what they're saying. I get their point, but you know, there's there's also ways to work smarter, not just harder. So, here's what did it for me is kind of the flip the switch is I had a mentor sit me down and for two hours two two to three hours we reverse engineered my end goal and and what it would take for me to get there.

6:02So, this is an actually an exercise that my mentor Joe Rankin who's actually the CEO that scaled Topgolf and a couple other pretty well-known companies. He's like, "Yeah, this is what I did to scale both companies from three to $4 million a year in annual revenue to $300 million a year in annual revenue." Is we just took our five-year goal and we just reverse engineered what we wanted to do. And fortunately, when you go through that process, like let's say if I were to sit down with a new investor, I ask them, "Okay, man, what's your three-year goal in real estate?" I would reverse engineer what that process would look like, what it would be required for that person to achieve that result.

6:40And once you get that down, you can actually learn to make things more efficient. So I'll I'll explain to you kind of how I did it with my mentor. So I sat down and I kind of just did an inventory check and I said, "Okay, like I have no money. I have no income. I have terrible credit. And you know, I'm pretty much a broke college kid. Like I have no network. I have no connections. I'm I'm pretty much just starting from zero. I'm starting from scratch." It's got a lot going for you. Yeah, that's right. Yeah. I didn't have a whole lot going for me. I was like the worst prospect that you could that you could possibly think of.

7:13So I I asked myself like what is it that I have to do? Like what are my yeses and what are my nos? So I knew I couldn't get like traditional commercial financing because I remember I had a conversation with the commercial lender a week before and I was like hey like what are your guys' requirements to get a commercial like to get a commercial loan? And you know they they asked for the same things like well we'd have to look at the P&L we'd have to look at the schedule E we'd have to look at the appraisal we have to look at you know this typical things and then we would run a personal financial statement right the PFS and I'm like what's that right and he's like well that's kind of the thing where you we see your liquidity we see your income and all this stuff and I was like okay like I would like a commercial loan and he started asking me all the questions like okay well what's your income what's your DTI all these things and

8:01He started laughing at me because he's like dude like we wouldn't even let you get a line of credit, let alone a commercial loan for an 18-unit building or a 24 unit building. And so I I knew that was out. So, I learned this thing called seller financing. And so I was like, okay, like if I'm going to do this, the seller is going to have to carry the note for me. And at this point, people are like, oh, dude, that's impossible to get. And if you find a deal where they offer seller financing, they're going to charge you 10% interest and they're going to want 50% down and they're going to want a 15-year amortized note.

8:41Right? So, I started thinking outside the box a little bit and I sat down with my mentor and I said, "Okay, let's reverse engineer what my ideal deal is." So, for me, based on what my capabilities and my yeses and my nos, my ideal transaction is anything between eight and 50 doors. I wanted in the greater area of Chicago outside of Cook County. And I was looking at three counties primarily, which was Kain, Will, and DuPage. And I was like, okay, like I gota look at those three counties. I need to buy seller financing.

9:13And so like it's just I pretty much created a who, what, when, where, how, and why. Yeah. Of my real estate investing business. The most optimal of optimals. And I figured with seller financing, I was like, okay, like that's going to be the most challenging part. So, let me figure out how to actually find the right people instead of finding the right property. So, that's and and like that's one of the biggest advice I tell people all the time is when they start is like don't look for properties, look for people. And so, I I wrote down I was like, okay, like what are the benefits of seller financing? Because at this point, this is a product that I need to sell, right?

9:46Like this is a product and I need to find like this is me if I was the owner of Spanx like figuring out what my ideal avatar is so that I could engineer all my messaging, my marketing, my brand, my advertising towards those people that were going to resonate the most with my product. So your product was the property you wanted to buy. Is that correct? It was it was the who, what, when, where, how of how I wanted to buy real estate. Okay. Right. Because like I that like these are the situations I need to look for versus hey let me open up Zillow and Loopnet and talk to brokers and see what just happens.

10:22Yeah. Right. Let me just look for just any deal. Right. So, I wrote down like the all the benefits of seller financing to the seller because I was like, "Okay, like I need to find people that resonate with these benefits." Very similar to again how a business is going to do the same thing with their product. It's like, "Hey, like they're they're going to sit in the boardroom every quarter. They're going to pay millions of dollars in R&D and kind of go who who resonates with with our product, right? Like I I can assure you Taylor Swift's marketing team isn't figuring out how to appeal to 65year-old black men.

10:55Like it's just not going to happen. They're going to be like, "Okay, like let's look for women, girls between the ages of 12 and 30." Yeah. Right. Who are more progressive in their voting and you know, like it just is what it is, right? So, the the benefits that I discovered were seller financing were is that it actually had some really good potential tax benefits. There was some good potential tax deference. And it primarily helped mitigate two different types of taxes at closing. One was the standard ordinary income, which is based on how much depreciation recapture an individual has, which to in layman's terms, to keep it simple, is hey, the longer a person owns the property, the more depreciation that they take.

11:38The more depreciation that they take, the more they would have to pay taxes on the depreciation that they've taken over that period of time. So the IRS allows for 27 and a half years of depreciation schedule for a typical residential commercial property. So like a multif family, right? If it's an rental property, right? Like that's what the IRS allows. So, I knew that if the longer a person owned the property, the more they'd probably have to pay in taxes, which means the bigger the headache and the bigger the headache, the higher sense of urgency they needed for that product.

12:12So, very much like, hey, like I'm selling you fire insurance and oh, your house happens to be on fire. Yeah. Right. Like this is the equivalent of selling water bottles at the beach. Yeah. Right. Or selling flowers at graduation, right? Like there's a thousand analogy. And and the second tax was the capital gains tax, which obviously is, you know, you got your basis. Hey, this is what I bought the property for. Five years later, I want to sell it for double. Okay, you're paying capital gains on whatever the the increase was on that valuation, right? So, there was the tax benefits, but there was also the ability to make money as a bank because I would pay these guys, hey, I'll give you 4% amortized interest, which means you get all the interest up front.

12:52Most people don't know how amortization really works, but the interest that you pay is typically all upfront. It's in the first five, ten years, right? So, okay, you make money as the bank and if you're a landlord who's owned the property for a long time and you're used to getting mailbox money, not a lot of people want to let that go. Yeah. Right. So, I needed to find people who pretty much owned their property for a long period of time and wanted their money to work for them. And so, I came to the conclusion I was like, okay, like I need to find older landlords.

13:23I need to find landlords that are above the age of 60 who are sick and tired of waking up at 2 am and having to deal with tenants because they're at the age where they feel like they don't have to anymore. I have to find 60 year olds who've owned their property for more than 27 and a half years because they have the highest tax impact. And I needed to find those landlords who again just want money coming in, which are typically individuals that are older. Like so for me, I'm 30 now. I don't mind getting up early and having to work and being a little bit more active because I have the energy and the drive to be able to do so.

13:55Those that are above the age of 65 70 probably not as much. Yeah. So now the question went from how do I find deals to okay now how do I find landlords that are older than the age of 60 who've owned their property for more than 27 and a half years in this area holding these type of assets. The second question is a lot easier to address than the first one. So now it became how do I find these individuals? The way that I found these deals all of a sudden the game changed. Now it went from looking at Zillow, Loopnet, working with brokers to now okay how do I find people that are above the age of 65 and 70 and I so for me like what I started doing is I started calling newspaper ads that were for rent like the forent newspaper ads because I was like okay like I have to now think like a 65 year old.

14:43Yeah. I have to now talk to the people in my network that are 65 and older that own real estate. That's like, hey, like what do you do, right? Where do you hang out? Who do you talk to on a day-to-day basis, right? And that's what marketing is, isn't it? At the end of the day, marketing is your ability to find the people that resonate the most with your product and communicating that you can solve their problem. Absolutely. Like that's marketing in its simplest term, right? Yeah. So, I realized that there was three three things that I could find these older landlords.

15:15I could do the newspapers. I would also spend three, four hours every Saturday morning calling for rent signs because I knew like they're 65 and older, they're probably not going to be super technologically driven. They're probably relying on methods that were used 30, 40 years ago. Yeah. Yeah. They've done the same thing for since before the internet. That's right. Yeah. So, so I would do newspaper ads. I would drive around and call the for rent signs, right? And it was funny because like the night before on Saturday night, I would have the Bulls game on in the background and I would just be on my laptop like just typing apartments for rent and I would plan routes because I I knew that if I could find an 18 unit building online that was for rent and I saw a for rent sign out in the front, there were probably going to be other buildings similar to its

16:03Size and characteristics in that neighborhood. Meaning that if I saw another for rent sign on the same street, boom, I I now have two leads. Yeah, two leads for the for the time of one. And the third thing I did is I started networking with property managers who are 55 and older because I knew that if if you're a property manager that's 55 and older, you probably been there for 25 plus years. It's like, oh yeah, I know I know Bill. Bill owns that 36 unit building over there. He's owned that for 40 years. I known Bill for 20 years. Our kids went to school together.

16:35All this stuff and I could just simply say, "Hey, I would love to buy Bill's building. Do you know if he's interested in selling?" Right? And I will create this arrangement with these guys where it's like, "Hey, like if I buy Bill's building, I will keep you as the property manager, guaranteeing that you will never lose any of your any of your business. Like your unit count will always stay the same if not grow bigger because I now have an arrangement with you where it's like if you can introduce me to all your buddies that you've known for 20 years then I will keep you as a manager and I I will grow your business right so now there's an alignment and even if there's like hey if we don't work out you make a 2% commission as the broker wow right so it was a it was a win-win scenario so I I focused on those three things like every every week because it's not enough for you to have now the ideal channels

17:24For you to acquire leads. You now have to create a system around those channels. So I created the KPIs, right? Key performance indicators. So these are these are things that I I will do, right? So in business there's lagging indicators and there's leading indicators, right? So if we're using a fitness example, the lagging indicator might be I want to lose 30 pounds. Well, we can't control that. We can't ever control lagging indicators, but we can control what's called leading indicators, which are things that we have control over that will affect the lagging indicators. So, if your goal is to lose 30 pounds, great.

17:55Your leading indicators can be, hey, I will go to the gym four times a week at 6:00 a.m. On Mondays, Wednesdays, Fridays, and Sundays. I will keep a calorie deficit of 2500 calories or less while maintaining at least 100 grams of protein every single day. I will make sure that I don't get any more than x amount of grams in carbs and x amount of grams in fat and I will cut out sugar between Mondays through Fridays. Right? So these are leading indicators that we can control. So if you're a beginner real estate investor, you can do the same thing, right? In fact, one of the reasons why I see a lot of people fail is they just quit, right?

18:30Like they they get some good headwind and they find a deal or two, they build some really good relationships, they go to meetups and all a sudden life gets in the way, right? So I I created after finding out okay I'm gonna drive around call for rent signs I created that into a KPI which was every Saturday morning you know for three hours I will drive around one particular market and collect as much for like I'll take photos of the forensites and I'll put them into my Excel sheet and then I'm going to find out who owns the property right so I just went to the county property tax assessors and I just put in the pin number I put in the address it shows you who owns the property if If it's an LLC, I would go to the, you know, business LLC search and Illinois state website and I would find out who the managers were, which were the owners of that LLC and then I would

19:18Pretty much just find out the phone number of that person. So, I would skip trace the information. So, I would go on like white pages, I would go on, you know, spoke like just any of these websites that you find out the person's name, phone number, right? I'll just Google them sometimes. Surprisingly, my most effective way of getting their attention wasn't actually calling them because people call us an unknown number. We don't really pick up. I would actually message them on Facebook and I would get the highest response rate because a lot of I mean hate to say a lot of old people spend time on Facebook. They do, right? They they post political stuff, right?

19:51Like Trump this, Biden that, right? Like that's where they spend most of their time. So, I would reach out to them on Facebook. I would cold call them. And sure enough, a very high majority of the people that I that I spoke with were 60 and older.