00:01

Welcome to episode 4 of season 11 of the Growing Empire Show. Today I’m back with my special guest, Trevor Calton, from Evergreen Capital and we’re going to continue on with our conversation about how to grow that real estate investment portfolio. So stay tuned.

00:16

Welcome to Growing Empires. Hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:37

So would you advise investors to use as little of their own cash as possible?

00:42

Absolutely. One of my favorite lessons in investing in real estate, there’s the four main rules that I always say you should follow. Bigger is better than smaller, sooner is better than later, certain is better than uncertain, and use other people’s money. If, as an investor, as an investor, you’re putting in time energy resources. And other people are looking for places to put capital, especially now, there is a massive amount of investor capital that is looking for competent places to put it. And if if you’re an investor that has experience and you’re organized, you are competent, then you should be able to go out and instill that confidence into investors and say, Hey, let’s partner and I’m going to help you invest your money and get a better return than you would get, you know, elsewhere. And you’re going to help me execute and do a, you know, a bigger deal than I would have been able to do without you. So it’s a partnership. And so I always, always say, Hey, if you are an investor, and you’re looking to go into commercial, and you don’t want to use all of your money, you shouldn’t. Go find friends and family, or other people that you know, in your network accredited investors would have you depending on the situation, and use their capital, because they’re using your time, energy and resources. And so a lot of people are afraid to go and ask other people to invest with them. Because they have the mindset that they’re begging for money. But that’s actually not the case. And when if you’re out there trying to find an equity investor for one of your deals, the way you need to approach it is you can just say, Hey, I am bringing you an opportunity. And this opportunity exists because I’m putting my time and energy and resources into it. But I don’t want to put my capital into it as well. I want to put your capital in, we’re gonna team up, all of those things need to go into the deal. And we’re going to share on the upside together.

02:49

Would you say that that is one of the easiest ways to help somebody scale and diversify their portfolio?

02:57

That’s one of them. Yeah, for sure. I would say the easiest way to scale is, well, the best way to scale is not easy. And this is really important. Because there’s there’s uncertainty and risk in scaling. And the best way to scale is yes, definitely use other people’s money, right? You want to, you want to start out with as much capital as you can, and you want to, you want to get the biggest property that you can. But the reason that real estate is so attractive for so many people is because of the use of leverage, right? We can take, let’s say we can take a quarter million dollars and go in and we can buy a million dollar property, right? We get 75% leverage. But if we increased the value of that property to a million and a quarter, we’ve just increased our equity by 100%. And so you can increase the value of one property, a certain amount. But the best way to scale is to not be afraid to sell and reinvest. And that’s people the biggest mistake I see the people that are wanting to scale but they’re not able to as fast is because they’re afraid to sell and they they finally got their property running tiptop and they don’t want to go and start over with a new property. But so many of your gains are only realized once you sell right? If you make a property appreciate from a million to a million half. Well, the only way that you’re going to realize that extra half million in equity is if you sell the property. Or refinance but you don’t quite get the same impact there. So not being afraid to sell once you’ve optimized the property is the best way to actually scale. I’ll give you an example. I had a client and he this is when I was real estate agent and he called me and he said Trevor I technically I’m a millionaire but I can’t afford to buy a broom. And I said, Well, why is that? And he said, Well, you know, I spent all my money on the property. And we talked about it, there’s about a million dollar value on the property. And turns out, he didn’t have any leverage. He had no debt on the property was a 16 unit property. He was driving actually a couple of miles because it was in a different county. He’s driven a couple hours to go manage the property. And he was only yielding a few $1,000 a month off this million dollar property was just a couple grand a month. And when I sat down with him, I said, Well, why aren’t you using leverage to buy something bigger? And he said to me, Well, I don’t want to have any debt. Debt is bad. And, and I said, I said, debt can be bad. But leverage can be a tool. And when I sat down with him, when I walked him through the numbers and said, based on what I’m seeing here, I think we can take you from 16 units to over 50. And you’ll have greater cash flow, you’ll have economies of scale and your operating expenses, and you’re going to actually make more money. And he said that it was the first time anybody had actually shown him the math behind optimizing leverage. We ended up selling his property. And we got him into a 90 unit property. He went from cash flowing less than 20,000 a year to cash flowing 80,000 a year. And that was prior to the crash of ‘08. In 2010. He called me and said Trevor hate rates have dropped. And I’d like to refinance, when we refinance the loan that we’d put them into in 2005, he ended up taking his cash flow from 80,000 a year to 300,000 a year. And that was just from the use of leverage. But had he not been willing to sell that property, the first one, and reinvest it into something else. And then also, in this particular case, start using leverage, he got a massive gains from that. But if he had said, No, I’m just going to pull out some of the equity, you know, he might have been able to pull out, you know, I’m not even sure how much you would have been able to pull that back then. But given what rates were out, maybe would have been about a half a million, so he would have been able to buy, you know, 2 million if he was lucky. But instead we got him, you know, we made huge leaps and bounds. And I love that because his, his family comes back to me and says, you know, with a little bit of math lesson, you’ve changed our entire family’s life. And, you know, so there are a lot of things that people don’t want to take the risk once they’ve already gotten things running the way they want. But you got to remember, that’s why you got into real estate investing in the first place, is you were willing to do some hard work, you were willing to take some risks, and don’t get comfortable. If you want to scale, you got to stay hungry, just as hungry as you were when you were chasing your first deal. And it’s all going to be okay. And what what people often don’t realize is as you scale, when you sell your 10 unit, and you get into a 50 unit, that 50 unit is much more appealing to more sophisticated property management companies. So you’re gonna be able to find more competent management, you’re gonna get economies of scale. So the scaling of your portfolio and the scaling of your wealth building actually goes into an upward sloping curve. And a lot of times, people just, they’re not going to take that leap because they’re stifled by fear. So I would say stay hungry, but don’t be afraid to sell.

08:41

The episode will continue in just a moment.

08:44

As an investor, we know it’s important to stay on top of market trends and real estate opportunities that add value to your portfolio. We also know that having a trusted source of reliable information to help you stay a step ahead of other investors is critical to your success. If you’re interested in having these types of resources, as well as access to me and my team, I invite you to join the Empire Investment Club. A free service that gives you an easier way to make sense of today’s and tomorrow’s real estate opportunities. As a member of the Empire Investment Club, you’ll get access to relevant resources and investment focused experiences such as live interactive webinars, market trend presentations, and investor socials designed to equip you with what you need to succeed. So whether you’re an active investor, passive investor, a combination of both or just starting out, the club is where you’ll get what you need to build a portfolio you love. To join, just head over to JenniferdeJesus.com, sign up, and we’ll see you in the club, where everyone’s on a journey to becoming a better investor.

09:42

I completely agree with that. That’s actually something that I say on a regular basis. I said, you know, it’s, it’s very much like cards, you got to know when to hold them. You gotta know when to fold them, right? That will be real estate investment. You can’t be it’s not a place that you’re living, right. You can’t be so emotionally attached to even if you put your own blood, sweat and tears into it right? You can’t be so emotionally attached that it prevents you from making good financial decisions that create passive wealth for your future and your family.

10:12

Yep. Yeah. And a lot of times when people are scaling, they think, Oh, I’m just gonna get more properties. And, as you probably know, there are limits to how many residential loans that any one person can get. And I’ve worked with many clients that had I had one client back in the day who had had 18 units total, it was a five unit, I think at a fourplex, a triplex couple duplexes, and some single family homes. And, and he was like I am, you know, I’m just losing my mind. And I have no time I’m driving from property to property and property. And we went through a long process of getting all of his properties ready to sell. And then we, we sort of pre marketed them so we could get some portfolio sales, and we negotiated our contracts, so that he was able to roll the sale of all of those properties into one 1031 exchange, he was able to roll all of the properties that he sold into one 1031 Exchange, ended up buying a 40 unit. And then suddenly, he was making more money, better cash flow. And he only had to go to one property and only had to pay one utility bill, or one water bill at one garbage bill, one lawn to maintain. And so sometimes people think they’re scaling. They’re not actually scaling their wealth building, they’re only scaling their workload. And so all yet another reason to be surrounding yourself with good advisors, both good real estate agents, good managers, good lenders, that can help you develop not just your strategy on the next property, but your long term strategy. When I sit down with a client, the very first thing I asked him was, well, what are your goals? And I’ll say to them, you know, tell me what you’re trying to accomplish right now. But also tell me what you’re trying to accomplish long term. And you want somebody in your corner who can help you anticipate what are going to be the the levers that you can pull there, what are going to be the roadblocks or what are going to be opportunities.

12:10

I agree, I completely agree. So I assume you are also a pretty big advocate of 1031 exchanges, since you’re an advocate of people selling their investments to potentially scale right and use that equity that they’ve built up. I assume that you would then also encourage them to utilize things like a 1031 exchange to defer their gains, and keep more of the cash in their pocket essentially.

12:32

Well, yeah, and I’m an advocate of selling if you’re trying to scale, not everybody should sell. If you only need the cash flow, and you’re not trying to build more wealth, you know, if you’re have one foot in retirement, and you just want steady cash flow, selling is not the best idea. But yes, if you don’t use it, utilize a tax deferred exchange, then you’re when you do sell, if you don’t do a 1031, you’re gonna have capital gains to pay on that if you had any sort of appreciation. And that reduces the amount that you can put into your next deal. But what people need to realize is the reason that the 1031 is so great, is it let’s say you have a $250,000 tax bill, well, that $250,000 can be leveraged into the next investment, to buy an extra million dollars worth of real estate. So if you’re gonna have to pay the taxes, but you might as well pay the taxes after you’re done trying to grow your portfolio. So there’s risk though, with the 1031 exchange, because you don’t always know what kind of replacement property you’re going to find. And yet another reason to have relationships with good brokers who are going to have off market deals, they’re going to have knowledge of when people might be selling in the future because their loans coming due or because they’re just gonna have more market knowledge. But a 1031 exchange can be really risky. I’ve definitely worked with people who sold their property, and then the plan that they had for their up leg. It didn’t, it didn’t pan out, and they ended up having to scramble to either buy something they didn’t want as much, or potentially pay the taxes, which is pretty rare. But fortunately, now there’s other opportunities, you know, Delaware Statutory Trusts or DSTs are an option for people that maybe want to get out of the business, but they still want to be able to utilize a 1031 exchange and defer paying the taxes. So as time goes on, more and more options are available to people. We actually when we go out and we syndicate an investment deal, we frequently have people that are coming out of a 1031. And so we will accommodate that by structuring it as a tenant in common. So we have the investment group. But if somebody wants to do a 1031, and they’re an investor, we really want to participate in this project. We’ll just structure it so they can do a TIC 1031 Exchange into our deal. And then they don’t have to worry about that and the nice thing with that is we can control the timing. So another opportunity for people who want to sell, and they want to do a 1031, but maybe they don’t know what the replacement property is going to be, is to partner up and find, you know, more experienced investors that can accommodate that 1031. You know, partners that you trust. So there are more and more options these days, but I would say, unless you’re done scaling your portfolio, to you know, defer the taxes for as long as possible.

15:32

Thank you for listening to this segment with my special guests, Trevor Calton. Please make sure you tune in to our next episode, where Trevor and I will continue our conversation about all things related to buying investment properties without using your own money and how to scale that investment portfolio. Until next time, take care.

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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio visit growingempires.com