I love telling people that I have been a Brandon Turner copycat when it comes to my real estate investing career. While our backgrounds in finding real estate are a bit different, our stories are quite similar because I followed what Brandon coined the “stack method.”
The stack method is self-explanatory: First, you buy one property, then two, four, six, and eight more, but you start small and scale up gradually over time. In the hopes that you can avoid (or at least laugh at) some of the mistakes I made, here is how I utilized the stack method and my biggest failures along the way.
Property 1: SFR: Too Cheap to Pay Rent, so a Live-In-Flip
My first purchase was driven by a mix of a scarcity mindset and a desire to be frugal. I found a promising house in a solid neighborhood, but it was priced way above what I was willing to pay. Luckily, that same house eventually went up for auction online, and after several clicks, unsure of what I was doing and scared to death, I ended up the winning bidder.
Little did I know that being a homeowner trumped the higher investor bids. Plus, I was able to use conventional financing, where typically cash is required at auctions.
During the renovation process, I took on tasks like ripping up old pink carpets and attempting to sand the hardwood floors myself. It turned out to be a tedious, frustrating experience. I also made the mistake of renovating the kitchen and taking down a load-bearing wall while still living on the property. To top it all off, I decided to redo the roof without permits, only to discover a constant drip into the screened porch when it rained.
So, what are the two morals of this story?
- If you haven’t done something before (AKA buying a house through an online auction), talk to someone who has done it before.
- Doing everything yourself is not the best approach. It is mentally and physically exhausting.
Property 2: Two-Unit and Vacant Lot: Dead Broke to Developer
After going from essentially zero in liquid cash to more than I’d ever had, I decided to go all-in on my next venture. Because of my naivety, I thought renovating a two-unit building and building a ground-up single-family home would be straightforward. First things first: I had to renovate the existing building.
Ignorant of low down payment loan programs, I went ahead with conventional financing, draining my savings for the down payment and rehab costs (liquid cash zero, again!). Never write a contract with a 10% escrow payment on a property that isn’t safe, sanitary, and secure—those are the three components banks look at for conventional financing.
Oh, and by the way, I waived my financing contingency, both of which were the ideas of my non-investor-friendly agent. By the grace of God and the angles of the appraiser’s pictures, the bank approved my loan, and the deal went through.
I had a family friend complete the HVAC work, and he recommended an electrician to me. However, trying to be a cost-saving genius, I decided to hire an electrician solely based on his low price and stellar Google reviews (which I believe were all fake).
Well, guess what? Their bid was way off, and when I refused to pay extra, the electrical service pole mysteriously went missing. No joke—gone off the back of the building! I reluctantly coughed up the cash to finish the project, feeling quite defeated, but completed it nonetheless.
So, what are the two morals of this story?
- Work with an agent who understands investing to help you mitigate risk.
- Trust referrals over internet search engines—being cheap can be expensive.
Property 3: Two-Unit BRRRR Done Right
With each new property, I gained valuable insights, honed my skills, and built my network. Prior to getting my third property, I thankfully got my real estate license, and I was finally able to take advantage of the FHA low down payment loan.
Additionally, since I had my license, I was able to use my commission as an agent toward the down payment. This meant my out-of-pocket down payment was only $7,000 for a $450,000 two-unit property.
This property was an MLS deal, and since I represented myself, I was able to act swiftly and establish a fantastic relationship with the buyer’s agent. These two factors were game-changers. Unlike my previous project, this property needed a cosmetic makeover, which meant less work and a quicker overall process.
After updating the kitchen cabinets, counters, bathrooms, flooring, paint, and fixtures, it was time for the fourth R of BRRRR (buy, rehab, rent, refinance, repeat). Knowing that the appraised value needed to align perfectly, I utilized a tip I had picked up from various BiggerPockets podcasts. I met the appraiser armed with a comprehensive list of improvements and a comparative market analysis (CMA) that supported the value I was aiming for. The appraisal came back right on the money.
So, what are the three morals of this story?
- Get your real estate license. You can save/make money and act fast.
- Bigger isn’t always better. Sometimes, less can lead to more (and with faster results).
- Don’t underestimate the power of tips and tricks you hear on podcasts—they work!
Property 4: Ground-Up New-Construction Single-Family Home
So, I had that vacant lot through the purchase of property 2, and by default, I thought the next step was to build something on it. Little did I know the incredible lessons I was about to receive in the realms of zoning and permitting.
Here are a few “zoning fun facts” I learned:
- If a previous developer submits plans and they are approved, it’s considered a type 1 zoning change. This means that any new developer (me in this case) had to build something similar to the proposed plans. Unfortunately, I learned this after I had already invested $9,000 in designing a two-unit building. Poof! There goes that money!
- When two adjoining city lots are combined (which was also the case for me), both the vacant lot and existing building need to be properly zoned for the vacant lot to be buildable. Well, the previous developer attempted this, but the zoning change legal document measured from the primary street 24 feet off, resulting in the rezoning of my lot and the building next door instead of my building. Cue a zoning change for my existing building.
- In order to execute a zoning change, your building must meet all current setbacks. Of course, many old Chicago buildings don’t meet the proper setback requirements for easy rezoning. This meant that prior to the rezoning of my building, a front setback variance was needed. So, add another couple of months to the zoning fun.
After addressing all the zoning issues, and a whopping 16 months later, the timing couldn’t have aligned more perfectly. This massive project became the catalyst to jump-start our company and test out our systems and processes.
And guess what? We sold our fourth property eight months later for a cool $1.1 million!
Property 5: 19-Unit Multifamily Using a 1031 Exchange
Before I get into this deal, if you don’t know what a 1031 exchange is, read this excellent article that goes over everything you need to know.
I realized that going solo limited my growth potential. Recognizing the need for like-minded individuals in my corner, I made a life-changing decision—I invested significantly ($6,000) to join a mindset mastermind, where I surrounded myself with motivated individuals. This single decision opened my mind to the impossible.
One crucial lesson I learned was the power of sharing your goals and intentions with others. After completing property 4, I had cash on hand and capital gains to defer. By spreading the word among my friends, I discovered an off-market 19-unit property.
While I only had half the down payment, a member from my mastermind group stepped in with the rest. Offering full price, the transaction was smooth sailing.
For six months, I attempted to be the property manager but soon realized that my strengths lay in being a general contractor. Handling a 19-unit property in a C-class neighborhood was a different ball game. It made me question whether my time was better spent building our business. The easy answer was yes. Bye-bye, property management.
Here’s the truth: Your time is incredibly valuable. I have known for a long time that I undervalued my own time. To level up quicker, I had to believe my time was worth more and make strategic decisions accordingly.
So, what’s the point of all these stories? My hope, if nothing else, is that you took away two things:
- You get what you pay for. There is a reason things are less expensive.
- Learning from others and not riding solo is the best way to avoid mistakes and scale quickly.
- Time is the most precious resource we have. Be aware of how you spend it and the value of the tasks you are working on.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.