Buy, Rehab, Rent, Refinance, and Repeat: Josiah Smelser on the BRRRR Method

The Myndful Investor Podcast

Buy, Rehab, Rent, Refinance, and Repeat: Josiah Smelser on the BRRRR Method

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Josiah Smelser (founder and host of The Daily Real Estate Investor podcast) discusses the Buy, Rehab, Rent, Refinance, and Repeat.

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Full Transcription

Alex Osenenko: Boys and girls, welcome to the Myndful Investor Show. It’s so good to have you here with us. And by us, I mean it’s Steve Rozenburg and I are your hosts. Steve, how are you doing today?

Steve Rozenberg: I’m going good, man, how are you my friend?

Alex Osenenko: You know, it’s fantastic. So we starting a new series you and I?

Steve Rozenberg: Yes.

Alex Osenenko: This series is going to be all about investing in single family homes. We have an awesome guest today to help us break down what’s called the BRRRRR strategy. It’s B-R-R-R-R-R. Steve, what does that stand for?

Steve Rozenberg: You got to add a couple R’s in there, right? Just to be safe, yeah.

Steve Rozenberg: (music)

Steve Rozenberg: So, we’ll let Josiah explain it more in detail, but basically, you’re going to buy it. You’re going to rehab it. You’re going to … And I’m not sure if I have this order correctly, so, Josiah, you can jump in. You’re going to rent it. You’re going to refi it, and then you’re going to repeat it. Did I get that right?

Josiah Smelser: You nailed it, man.

Steve Rozenberg: Bam! Bam! First time, how do you like that?

Josiah Smelser: Episode complete.

Steve Rozenberg: Episode complete. Hit end. High five.

Josiah Smelser: That’s it. That’s all you need to know.

Alex Osenenko: Let me set this up. Josiah Smelser, we’re very lucky to have him in the podcast. A, he is a host. Pre-show, we talked about his podcast and why he started it. It’s a fascinating story. He’s the host and founder of the Daily Real Estate Investor podcast. So check him out there. He’s been doing it for a year, he’s got a good library of episodes. Lots of good stuff there. Formerly though, a college finance professor. Josiah, what up with that?

Josiah Smelser: Yeah, two years, man. It was a good time. I got my master’s degree, and at the end of the two years they wanted me to go get my PhD. They wanted a 12 year commitment to pay for it.

Steve Rozenberg: Whoa.

Josiah Smelser: And I was like I can’t give you 12 years because I wanted to start my own business, right? It felt like a retirement job too. It was challenging. It was a lot. I was teaching seven different classes, and it was actually pretty stressful. Anyway, I left that and launched my own real estate business, and it’s been a great decision. Thanks so much for having me on the show, guys. I’m really excited to be here.

Alex Osenenko: We’re excited to have you too, and the audience, I’m sure, is getting on the edge of their seats at this point because over 12 months you’ve built that three million dollar portfolio of rental properties using the BRRRRR strategy, so we’re going to break it down. I guess maybe we can start with this. Josiah, why don’t you break down the BRRRR strategy into its components and let’s start getting shovels out and start digging in.

Steve Rozenberg: Man, we’re just digging right into this aren’t we?

Josiah Smelser: Yeah, the BRRRR strategy has been my favorite way to build my real estate portfolio. If you’ve never purchased real estate before, you’re kind of wondering how do you make massive progress? How do you go quickly through this? Because really the bottleneck … There’s a few bottlenecks. Number one, you’ve got to find deals. Number two, you have to have money and then you have to have time. Really, what was hanging us up was the money part of this. If you get a deal … Let’s say you’re just starting off. The B part of the BRRRRR strategy stands for buy. So you’re trying to find a deal to purchase, okay? So how do you purchase a deal, get it fixed up, get it rented out, get it refinanced and then go purchase another? That pretty much is the foundation of this.

Steve Rozenberg: The core. Yeah.

Josiah Smelser: That’s the essence of this whole thing, the core of this whole thing. When we started off, we’re like, okay, we’re going and buying it. We look for a deal. We find a deal, we buy it. We’re getting it renovated, and the renovation is going to take a little while. Then when you go to get it refinanced there’s rules around the refinance process of pulling money out of properties if you’re going with Fannie Mae or something like that. Fannie Mae will allow you up to 10 properties in your own name before you’re shut off from them. In different states you have different ability with maybe financing 10 more in your spouse’s name.

Josiah Smelser: You can check. I don’t know, of course, where everyone’s living, but in Texas where we’ve been buying a lot of these I’m allowed to put 10 in my name and then 10 in my wife’s name as well. That really allows us the capacity to take down 20 of these. When we started off what we found was the process of buying something and then putting money down on it and then getting it fixed up and then getting it refinanced we had to wait six months. Fannie Mae was requiring us to wait six months.

Steve Rozenberg: That’s called seasoning of the title, correct?

Josiah Smelser: Exactly.

Steve Rozenberg: For people that don’t understand.

Josiah Smelser: Yeah. They’re seasoning the loan. They’ve come up with this six month requirement for whatever reason. It is what it is.

Steve Rozenberg: Well, I think they… Just to kind of, I think, for people to understand the complexity of it, that had kind of evolved after people… obviously, some unscrupulous people buying properties and turning around and pulling a bunch of money out of it. I think the lenders finally said, “You know what? You need to hold this for a little bit.” I remember at one point it was down to 30 days seasoning, and that’s when things were going crazy back in 2006 and 2007 where it didn’t matter. That caused a lot of problems because a lot of these numbers were inflated, and then they would pull more money out, and so now they’re kind of saying, “Okay, we want this to settle a little bit. You’ve got to own it for a little bit.” I think it’s like everything there was a disaster, so then they put in some cautionary-

Josiah Smelser: Sure.

Steve Rozenberg: … things in so that people don’t take advantage, just so people understand why seasoning exists.

Josiah Smelser: Yeah. Absolutely. They’re trying to protect themselves and make sure they’re not lending too much money too quickly. But it’s a bottleneck for the investor.

Steve Rozenberg: Sure.

Josiah Smelser: Because that capital, if you’re required to put 20% down… You’re required to put some chunk of money down on every deal even with hard money and all that. We can unpack that here in a second if you want to. When we first started off we were just buying them off the MLS, going to the bank, getting a loan. They want 20% down. A $100,000 deal, they want you to put 20k down when you start, and then you’ve got repairs. If you do a subject to completion loan on the property, they’re going to lend you based off of what the property would appraise for once it’s fixed up.

Josiah Smelser: Let’s say you buy $100,000 property, you’re going to put… Sorry guys.

Steve Rozenberg: That’s the beauty of getting to work from home, right?

Josiah Smelser: Yeah, exactly. I even locked the door. Somehow he got it open.

Steve Rozenberg: They’re smart those kids.

Josiah Smelser: You can tell he’s out of the hospital. He’s back.

Steve Rozenberg: Yeah, exactly.

Josiah Smelser: Let’s say you buy a $10,000 property, you’ve got $50,000 in repairs, and it’s going to be worth $200,000 when you’re done. The traditional route, they’re going to have you pay your $100,000. They’re going to take 20% of basically the 150 of the loan. They’re going to do a loan to cost, which is taking the maximum cash out of your pocket. So 20% of 150 is going to be $30,000. You’re putting down on your… As long as it appraises for 200 or whatever and they’re getting their loan to value that they need. So you’re going to put your 30k down, okay? There’s $30,000 that’s out of your account that’s locked into the deal. If they require you to keep that in there for six months, you can’t keep using that capital to go buy more deals.

Steve Rozenberg: Right.

Josiah Smelser: The first pain point that we tried to solve was how can we get our money back quicker because we want to do more deals than just… If we’ve got $100,000, and we want to keep a little bit of money in reserves, and we do three deals like I just said-

Steve Rozenberg: You’re done.

Josiah Smelser: … we’re locked out for six months. We can only do six properties in a year, and we’ve only got $10,000 in reserves. What was really a game changer for our business was we started figuring out a cheaper and quicker way to do these things while conserving our own capital. What we started doing was using hard money as long as the numbers worked, and they would lend 90% loan to cost on a deal, so that same deal I just talked about they would lend 90% of the 150, so it’d only require you to put $15,000 in instead.

Josiah Smelser: Then I went and found private money. Private money lent me the other 10%. Private money lent the other $15,000. So now I’m able to do as many deals as fast as I want because I’ve got my-

Steve Rozenberg: You’re in it for zero.

Josiah Smelser: Yeah, I’m in it for zero, and I’ve got my capital in my account in reserves. Any problems that come up, I’ve got that cash sitting there. So what that allows me to do is I can do 10 properties at once if I want to.

Steve Rozenberg: Right.

Josiah Smelser: And then the cool thing is on the Fannie Mae side on the refinance you don’t have to season it if you’re not pulling cash out of it. You can refinance it as quickly as you want to. When you go to do your… Let’s say you buy your property and you get your renovation done in a month, and you’re ready to rent it, Fannie Mae will let you refinance one month in and pay off that first and second because you’re not pulling cash out.

Steve Rozenberg: Right.

Josiah Smelser: That allows you to rev that cycle really quickly. That’s how we’ve been able to make so much traction so quickly.

Alex Osenenko: So let’s break this down a little bit.

Josiah Smelser: Sure.

Alex Osenenko: First of all, conceptually, how much value can you drive with the renovation? Let’s keep using the same example for simplicity’s sake. You found a deal for 150, let’s say you get your hard money and your private money so your cash out of pocket is zero. How much do you invest in the rehab, and what do you appraise at afterwards?

Josiah Smelser: Okay. You’re asking about the first scenario like if I just go through traditional route with the bank how much am I putting into the reno? Is that your question?

Alex Osenenko: Well, either way you finance it, the question is what is the home going to be worth? How are you planning for it?

Josiah Smelser: We’re always looking. We’re looking at deals. We’re basically buying distressed properties. What that means typically is that the property is either a foreclosure, it’s really beat up, there’s something wrong with it, it needs some attention and love. What we try to do is we try to all in be in it for 75% loan to value or less. For the sake of round numbers, if I buy something for $50,000, I would need to be all in for $75,000 or less if that property is worth $100,000.

Josiah Smelser: What we do is we back into it. We say, “Okay, the ARV, the after repair value of this property is $100,000. We can get this property for 50, and so we’d like holding costs… financing costs, closing costs, holding costs and repair costs to be $25,000 or less. If we can come in at 20, we’d have a $70,000 debt on a property worth 100. That’s below 75% loan to value, so when I go to do my refinance, they’re going to lump that all into one loan, and they don’t keep any of my capital.

Josiah Smelser: That’s basically the BRRRRR strategy in a nutshell. It’s trying to take control of a property if you can with none of your own money but with a margin of safety, which is that 25% equity or more. That comes on the refinance.

Alex Osenenko: So let’s slow it down even more.

Josiah Smelser: Okay.

Alex Osenenko: Let’s use that $100,000 post renovation value. Is that what you call it?

Josiah Smelser: The after repair valve. The ARV, that’s thrown around. Yeah.

Alex Osenenko: After repair value. Okay, so it’s 100,000, that’s what we’re estimating at. We can get the house for 50. Let’s say we do the renovations for 25. So now 75. Now what can you pull out of the house?

Josiah Smelser: If you’re in it for 75, and it’s worth 100, most lenders are going to cap you at 75% loan to value, so you couldn’t pull anything out, but what you can do is consolidate. If you had a first and second from a hard money lender and private money, on the refinance Fannie Mae is going to pay those guys off with that 75% loan to value loan, and you’re going to have one loan with Fannie Mae for that 75,000. Does that make sense?

Alex Osenenko: It does.

Steve Rozenberg: Alex, I think maybe the thing that you’re asking and what Josiah is saying is that some of these deals that you do the goal is not necessarily always to pull money out, the goal is that he’s getting in a deal with zero out of his pocket. He’s going to basically get a deal, buy it, fix it up, put it in, still be at 75% of the value and have zero dollars in it, and be able to rent this thing out and be able to keep on moving around.

Steve Rozenberg: Now, the thing about hard money that I think people have a misconception on is they don’t understand it first of all. Josiah, it sounds like you do, and a lot of people do, and I’ve got some good friends. We’re going to have Darrel Dyke on our show in the future that talks about hard money. It’s really what’s called a bridge loan. It’s a loan to get you from purchasing it to closing it and have another set of loan set up for the next round of what you’re going to do. The hard money is just to get you the deal so that you can get it quick because hard money will get you the money right away, number one. Number two, they don’t put you through all the things that you’ve got to do with normal conventional lending.

Steve Rozenberg: You don’t have to abide by all the rules that you have to with Fannie Mae or conventional or they call it, A, paper lending. To me what hard money gives you is speed. You’re able to get the deal and say, “I’ve got a deal. I need this money like tomorrow.” If everything works out in a perfect world, they could get that to you. Then he’s got his private money guy that can give him the rest of the money, he could buy that, rehab it, and then what hard money people do is they do what’s called a draw.

Steve Rozenberg: Let’s say you have $25,000 in repairs, they’ll pay that out in draws as they inspect the house to verify that that work is being done correctly because it’s their money. They want to make sure that if they’re loaning you this money and they’re paying contractors, especially if you’re new in the industry, they don’t want you to get burned because they don’t want to get burned.

Alex Osenenko: Wait one second. I just want to break it down for the sake of our audience and my own sanity. Josiah, you’re also borrowing the actual renovation costs, like the 25,000? So you’re not only taking a $50,000 loan, but you’re also levering the repair costs?

Steve Rozenberg: Correct.

Josiah Smelser: That’s correct. If you didn’t have this private money piece, which I was talking about, what’s kind of like the last layer that we figured out. If you just had hard money, and your deal was $100,000 and your costs were going to be like we were saying you get it for 50, you’re in it for 75, you have 25 in repairs, they’re going to lend you 90% of 75. They’re going to lend you 75 minus 7,500.

Alex Osenenko: Got it. And then-

Josiah Smelser: And then $67,500. What they’re doing is they’re giving you cash to buy the house, and then like Steve was saying, you’re going to pay cash out of your pocket for the repairs and you’re going to make a draw reimbursement request from the hard money lender. They’re gong to need receipts and pictures or maybe do an inspection or something like that. Then they’re going to send you a check to reimburse you for the cost of the repairs.

Josiah Smelser: The beauty of all this is when you go do your refinance, if you got a good enough deal and you kept your renovation costs low enough and you pull this off like you can, you refinance out everything into one loan with Fannie at a low interest rate locked in for 30 years, and you didn’t have any of your own money locked in long term.

Josiah Smelser: Now, sometimes you’ll have a little bit of money locked in. Sometimes you can get money back. I find that it’s more often that you have a little bit of money locked in than you’re getting money back. But in the same scenario, if the thing is worth 100, you get it for 50, if your repair costs are $10,000 and you’re all in it for 60, you could do a cashout refinance with Fannie Mae at 75% loan to value. Since you’re only in it for 60 and they’ll lend you 75, you can get a check for $15,000.

Alex Osenenko: Fifteen. Got it.

Josiah Smelser: That’s where the cashback part comes in. That’s a lot more difficult to do than just breaking even or even leaving a little bit of money in because one thing that a lot of investors don’t consider is the holding costs on the thing. You’re paying interest only payments to the hard money lender the entire time that you’re waiting to do this refinance, so-

Alex Osenenko: What would be the example-

Josiah Smelser: You’ve got to factor that in.

Alex Osenenko: Josiah, sorry. What would be the example of an interest amount in our example? Let’s keep this consistent with the numbers. What would be the interest payment? What do they charge?

Josiah Smelser: The last few hard money deals I’ve seen, they’re charging about 10% interest and two points. If they’re lending you a total of 75,000.

Alex Osenenko: I’ve got a calculator.

Josiah Smelser: If they’re lending you 75,000, you’re going to have $7,500 in interest for the year divided by 12, so it’s going to be interest only payment 7,500 a year divided by 12, so whatever that comes out to. That would be your monthly payment.

Steve Rozenberg: And now normally-

Alex Osenenko: That would be $625. Plus, you said two points?

Josiah Smelser: Plus two points is paid at closing. So 7,500, two points on that is going to be, what? What’s that?

Alex Osenenko: You’re the math professor, man. You figure it out.

Josiah Smelser: Fifteen hundred bucks. Right?

Alex Osenenko: Fifteen hundred bucks.

Josiah Smelser: Yeah.

Alex Osenenko: So two points. You don’t pay two points on a whole $75,000 loan, right? Or you do?

Josiah Smelser: You do. [crosstalk 00:17:55].

Alex Osenenko: It’s two percent?

Josiah Smelser: Yep. Then they’ll have some other miscellaneous fees in there.

Steve Rozenberg: Josiah, the goal is not to hold this for a year, the goal is to get this turned and get your money in and our as quickly as possible, right?

Josiah Smelser: That’s correct.

Steve Rozenberg: Maybe three months. You really… Alex, once you get this money, the clock is ticking. You do not mess around. When you have hard money on the line, you are doing everything you can to get this thing turned as quickly as possible.

Alex Osenenko: I just want to make sure our audience respects that aspect and has the number assigned to it because I don’t want them to turn off the podcast and run out and start getting deals right now. We’re going to talk about… I can totally see you losing your pants on this one. There’s just so many ways you can… Inspection didn’t pass. There’s so many different-

Josiah Smelser: Oh, yeah.

Alex Osenenko: Before we go there, 625 bucks a month plus the 1,500, 625 a month are your holding costs. If you’re holding more than you’ve estimated, let’s say the roof took longer or whatever, you’re bleeding, right?

Josiah Smelser: Oh, absolutely. That’s a mistake that’s very easy to make especially when you haven’t done these before is underestimating your holding costs or the time it’s going to take you to get all this stuff done because when you start you don’t have the processes and the system set up. You may not know who you’re going to use for your contractors. That’s a rookie mistake, right? You may not know how long it takes to actually do a renovation of this scale. You may not properly estimate your repair costs. There’s a thousand different ways to screw this up.

Josiah Smelser: And then the linchpin of the whole thing, and I am an appraiser so I can say this, the appraisal, the appraisal on the backend. If you think it’s worth 100 and it appraises for 90, they’re going to lend you 75% of 90, which could make you leave money in the deal. That’s something you really got to know your numbers on the front end. I’ve even started putting a package together of comparable sales, everything that’s been done to the property, kind of a little history and like package that we give to the appraiser. We’re like, “Hey, this is what we did to the property. This is what we spent on the property.”

Steve Rozenberg: Telling the story.

Josiah Smelser: Here’s comparable sales in the area. We don’t tell them what to appraise it for because you can’t do that, but you can certainly say, “Hey, here’s everything that’s been done, and here’s good comparables. Here is a property in the same subdivision,” all that. Appraisers actually appreciate that, so I wouldn’t be scared to do that.

Alex Osenenko: You just them out with data. You help them out with data-

Josiah Smelser: Absolutely.

Alex Osenenko: … in their job, so that’s great.

Josiah Smelser: Yep.

Alex Osenenko: Here’s a question burning, it’s burning in my mind. I can’t get rid of it. Your business, you’re running this thing. You build this portfolio. How do you get paid, man? You got to pay rent. You got to pay mortgage for your own house. You have kids.

Josiah Smelser: Sure.

Alex Osenenko: You got to buy them clothing. Where’s the monthly income coming from, brother?

Josiah Smelser: Sure. Well, there’s a number of different ways to monetize this. You’ve got to kind of choose your own adventure, if you will. You can build a cash flow portfolio, which Steve in his book talks about that. A lot of times the properties that are giving you a high margin on your cash flow are going to be the lower end properties.

Alex Osenenko: Right.

Steve Rozenberg: Right.

Josiah Smelser: That’s one way to go. Another way to go is to build a portfolio of high quality properties that the cash flow is not going to be as great. What we have targeted is something kind of right in the middle. We look for B class properties. We try to cash flow $200 a property. These are single family. Two hundred dollars a property. Now, when I say cash flow, that’s net of all operating expenses. These are managed by third party. That’s also net of the debt payment, so that’s taxes, insurance, management. We’ve got money in there for repairs and all that kind of stuff and vacancy and collection, loss, and all that.

Josiah Smelser: We want a cash flow of 200 bucks a door. We want this to be located in an area that we think has a reasonable chance of appreciating at 3.5% a year or better. That’s why we’ve picked Fort Worth, Texas. I used to live in Dallas Fort Worth, and I know those areas really well because I run my own appraisal business. I started an appraisal company out there. You were asking about how I make a living. My partner and I have decided on all this, we’re going to reinvest all of our profit back into buying more deals and into paying our portfolio off eventually. We’re not going to take any capital out of the business.

Josiah Smelser: Brian Murray said the same thing. Brian Murray was on our real estate Mastermind that Steve and I were a part of in Hawaii. Brian said that in his book that he reinvested all his profits in his apartment business, and I think that’s one of the reasons that he’s been so successful. If you’re living off of the cash coming off of your real estate business, you’re not reinvesting it. Where you’re going to get that really dynamic growth is by reinvesting everything back in.

Josiah Smelser: We’re seeing cash on cash returns well over 20%. So you think every dollar I take out of this, I’m losing that 20% compounded growth for the next 30 years. That’s crushing.

Steve Rozenberg: You’re building wealth is what you’re doing.

Josiah Smelser: Exactly.

Steve Rozenberg: Other people they want the cash flow out of it or build them the job.

Josiah Smelser: Exactly. We decided we want to build a high quality portfolio of BRRRRR properties. We want to hang on to this thing until we’re retired. Right now, we’ve got three million. If you run the numbers at 3.5% here, I’m 38 years old right now, until I’m 60 it’s worth about seven million bucks. We would split that out, and that’s three and a half million a piece. We’re going to try to keep growing it. We’re going to try to have at least five million before we cut off the single family and just start focusing on apartments.

Josiah Smelser: How do I make a living? I run my own appraisal business. I’m also a real estate agent, so I make money off of commissions when I’m… Some of these are local, so I get a commission off when we close on them on the by side, and then I’ve got other people that know I’m an agent, they come to me wanting me to help them find investment properties and that kind of thing. So it’s been really cool because I spent about half my day doing appraisal work, and I’ve spent about half my day working on investment properties doing this, and this is kind of like a retirement thing for us.

Steve Rozenberg: I’ve got a question Josiah.

Josiah Smelser: Sure.

Steve Rozenberg: You and I met, and we had a great time in Hawaii at the Brandon Turner Mastermind and stuff. We got to know each other very well. I didn’t know the part about the professor, which is interesting. I guess my question to you is, when you thought that real estate was going to be the track that you were going to go down, how did you do it? Did you sit there and create a strategy saying, “Okay, here’s what I’m going to do. I’m going to create an appraisal company, and then I’m going to start doing by and hold”? Or did you just kind of say, “I know what I don’t want, which is I don’t want to be in the teaching industry, so I’m just going to pivot out of this, and I’m just going to jump into whatever catches my fancy right away”? Can you walk people through that?

Josiah Smelser: Yeah.

Steve Rozenberg: Because I think a lot of people, they may think that you just said, “Screw it. I’m out of here.” You lit the desk on fire, and you ran out, and you jumped into real estate. Normally, I’m guessing, that’s probably not what happened.

Josiah Smelser: Yeah. I already had my appraisal license. I’m a certified general appraiser. I was the multifamily specialist at CBRE. CBRE is the largest real estate service’s firm in the world, a Fortune 500 company. I was the apartment appraisal specialist when I worked at CBRE, so I have my commercial appraisal license. I can appraisal commercial or residential. There’s actually a shortage of appraisers nationwide. You have to have a college degree in a lot of states on top of another two or three years of classes.

Steve Rozenberg: Right.

Josiah Smelser: And then you’ve got to pass the state exam.

Steve Rozenberg: It’s not easy.

Josiah Smelser: It’s difficult. It’s not easy to get the license. It’s a pain.

Steve Rozenberg: Right.

Josiah Smelser: A lot of people don’t want to go back after they have their college degree and start on something else. I got this license back when I was in Texas and helped buddy start a residential appraisal company then, and so I learned pretty quickly. We started our own business when I was 21. We were running this thing out of our house. We had more business than we knew what to do with. I was like, “If I ever need to, if I ever want to, I can quit my 9:00 to 5:00 and go start an appraisal company.”

Josiah Smelser: Honestly, when I decided I wasn’t going to give the 12 years and go get my PhD and all that, the first thing I thought of was the appraisal business will put food on the table. The investment business will be the retirement plan. So far, it’s been crazy. It’s been a blessing to do it because the money has been better working for myself than it was when I was working for CBRE, which is insane because you kind of think when you cut the 9:00 to 5:00 off and you start your own business, you kind of think like, “Well, this works for some other people I know, but I’m going to fail at this for some reason.” You know?

Josiah Smelser: You got to honestly just give it your best and get in there and try and work hard at it. It’s one of those things if you put in the time and you keep grinding, it’ll work out.

Steve Rozenberg: Now, when you started going down this path, and I think this is important. As you read my book you know I’m a big proponent of talking about challenges that arise. I say failures, but things that pop up that you have to reassess on and audibilize on. Can you give anyone some things that you went through that you kind of just got smacked in the face or you were just like, “Man, this is not what I thought”? Then how did you work around that. A lot of it it’s not a physical fix, it’s normally a mental fix.

Josiah Smelser: Oh, yeah.

Steve Rozenberg: I’m also curious on the “balance” that you have with family life, with your wife, and how you kind of bring her into the mix. I know she’s involved with you as well. How did you get her to buy into this as well? As you know, some people, you go to a seminar, and you come running home, and the wives are like, “Oh, my God. Here we go again. He just went to a seminar. He’s buying the world. He’s doing this.” Can you talk about some failings and then how you aligned the family with that?

Josiah Smelser: Yeah. Would you prefer to hear about failings in my business or in my real estate investments? Which one do you want?

Alex Osenenko: I love Steve’s question. Steve’s question is like six questions in one, four parts. It’s awesome. Tell me about your life, all of it. I want all of it now. You pick, man.

Josiah Smelser: Man, I would say one of the hardest parts about starting the business was I basically formed my LLC and started going out and networking with different banks to get on their appraisal list, and a lot of the banks would say, “Our list is full.” It was like, “Cool.” Well, I know there’s a shortage of appraisers, but you guys aren’t letting me on your list. I figured out pretty quickly a lot of these banks it’s kind of like a good old boy system where they’ve got a couple of buddies on their list, and they want to give their buddies all their work.

Josiah Smelser: I just made it a numbers game just like the real estate game. If I’ve got to talk to 20 banks to get on one list, I’m going to go talk to 20 banks. I remember I would… When it would start raining, I would go get bagels and I would go out in the rain, walk into banks and talk to the person in charge of their appraisal list. They’d see me come walking in sopping wet bringing them food, and that works, man.

Steve Rozenberg: Nice.

Josiah Smelser: People are like, “Dude, this guy’s out in the rain trying to get on lists. This guy really wants it.” You know? Pretty quickly I had more appraisals coming in than I could do. Then I applied the 80/20 rule to my appraisal business. Eighty percent of my most problematic deals and appraisals were coming from 20% of my clients. So I got rid of those clients and then focused on my best work and those clients. And all of a sudden my appraisal business got a lot more fun to be a part of. The work was better, and it was more profitable, and then-

Alex Osenenko: Can I ask you… I’m so sorry. I’m very curious about this. What’s-

Steve Rozenberg: He’s only on part one of my question, man.

Alex Osenenko: Just hold that pen where you were going. What is a bad appraisal? Can you define it for us? You said, 20% gave you bad business. What does that mean?

Josiah Smelser: Yeah. I was talking about my clients. As an appraiser, I’m doing single family. I’m doing residential one to four family right now. I’m not doing commercial, although I can, but I’d have to go by a bunch of data that I don’t have right now and all that. A client that can be difficult just on the management side from the appraiser’s standpoint would be a client that just basically asks for a thousand revisions on every report and calls you up and wants to argue with you about everything that’s been done. You’re only getting paid so much per report, so you don’t want to spend all day doing one report. You know what I’m saying?

Josiah Smelser: There’s some clients who are easier to work with than others. I just decided, okay, this is how much I need to make for my time. If I’m not going to make this much for my time, then I’m not going to do this anymore. Steve, we talked about this, but you had this virtual assistant business going. I have a virtual assistant that’s really made my life a lot easier in my investing business. You can get a virtual assistant to kind of help cut down on the repetitive tasks that you don’t need higher level for. That really opened up my business as well is getting a virtual assistant to help me out.

Alex Osenenko: Cool. Sorry, I threw you off a little bit. You were-

Josiah Smelser: No, that’s good.

Alex Osenenko: … answering the fifth question.

Josiah Smelser: Yeah. You’re talking about mindset, Steve.

Steve Rozenberg: Yeah.

Josiah Smelser: Throughout this entire… the last 12 months of doing this, I basically journaled a lot and wrote a lot. I’ve been working on a book. The book is going to be called, “Dream It and Build It. How to Crush Your Real Estate Investing Goals.” It’s all about mindset for this whole thing. The E-book will be on Amazon in December, and the hard cover will be on Amazon January 1st. I would love for everybody to check that out. It’s not out quite yet. I don’t know when you guys are going to air this, but it’s coming out soon.

Josiah Smelser: Anyway, mindset in real estate investing is everything. I know it applies to pretty much every other kind of work you’re doing. Mindset is 95% of it. Because if you think you can’t do it, you’re not going to be able to do it. I can guarantee you, you’re going to run into a thousand problems. If you’re not willing to have the right mindset to those problems, you’re going to get smoked because you were talking about a second ago, wow, this refinance it seems like there’s like six things that can go wrong. They will go wrong. You know what I mean? They will. It’s not if they will, it’s they will. Your appraisal will come in low sometimes. Sometimes your costs will be higher than you thought they were. Sometimes you’ll go under contract on a property and discover something about it that wasn’t in any kind of disclosure and no one told you that will kill the deal.

Josiah Smelser: There’s a lot of stuff that will go wrong in real estate, but that’s why you make great money at it. It’s a problem solving business. You have to be willing to adapt this mindset of we’re going to have a lot of problems come our way, we’re just going to have to figure them out one at a time and just keep grinding away at it. The people who have that kind of mindset will get through it and be successful.

Steve Rozenberg: What-

Alex Osenenko: Steve, I’m sorry, just another curiosity question. How do people in your shoes, the BRRRRR investors, the successful ones, think about property management? Is that a component you build into your costs, and how do you find a good one? Or this is kind of you self-manage for the time being? How do you think about that?

Josiah Smelser: I think property managers are worth their weight in gold if they’re good. That’s a qualifier, if they’re good. If they’re just taking 10% and not really doing much, you’re better off without them. If you find a really good property manager, they’re worth far more than 10%. It sounds crazy saying that, but this is the reason why. If you’re paying a property manager 10%, and I’m talking one to four family here. If you’re paying a property manager 10% to manager your property, and they’re keeping your property occupied, they’re cutting down on your vacancy, that’s a massive benefit to you as an investor. If you have a good property manager, and your average vacancy rate is… Your property is vacant one month out of every two years versus you have a mediocre property manager and your property is vacant three months out of every two years or something like that, that average property manager is costing you three times as much money as the good one.

Josiah Smelser: But I bet you the good one is not charging you three times as much to manager your properties. You may have one charge you 9% and one charge you 10%. You’re paying 1% more to save on an extra two months of vacancy. If your property is renting out for $1,500 a month, you just saved yourself three grand by paying 1% more on your rent, which is not much. We’re talking pennies here compared to the savings you’re getting.

Josiah Smelser: We have a really great property manager that we’re using right now. They save us on repair costs. They save us on vacancy. They’re always looking out for our best interests. They look at our property as if it’s theirs. They take care of our tenants, which is another thing I’m really passionate about. I want my tenants to feel like they’re taken care of, they’re not getting screwed by their landlord, like their landlord cares about them. I think property management is the way to go for your properties.

Josiah Smelser: We own a lot of stuff out of state because we like Fort Worth, Texas. I live in Huntsville, Alabama right now. We own a couple locally, and we manage those ourself, but all of our stuff in Fort Worth and we have a few in Little Rock, Arkansas, those are all managed by third property management companies.

Steve Rozenberg: I think also-

Alex Osenenko: Gotcha. So the definition… Steve, one second. I’m just going to put a cap on this one, and you can go into auto state investing. I think you wanted to. We have a few more minutes to cover that.

Steve Rozenberg: Sure.

Alex Osenenko: Your definition of good, because we are a property management company, I’m very curious what makes good for people in your shoes, people who are running this BRRRRR business and serious about investing. The two things I’ve heard is reduced vacancy and reduced cost of repair and take care of residents. Three things. That’s-

Josiah Smelser: There’s one more big one and that’s communicating with the owners. Yeah.

Alex Osenenko: So true.

Josiah Smelser: As an owner, if you email your property manager, you don’t hear anything back for a couple of days, you start getting concerned. You don’t know what the property manager is doing. The property manager is probably out at some property fixing something or how knows. But from your perspective, you’re like, “I guess they just don’t care about what I’m… ” You know? I think when you email your property management company, if somebody will just acknowledge that you’re requesting something and just say, “Hey, I’ll get back to you on this. I’m working on this,” or something like that, your satisfaction ratings will go way up.

Josiah Smelser: The second cutting costs down, there’s a leaky toilet, instead of just saying, “Hey, this is going to cost two grand to fix,” which seems really high, you’re going to say, “Hey, I think I’ve got… ” You’re going to give some options on ways to save money on this because that money is coming out of the profitability of these properties, and what’ll put you out of investing is letting your costs go too high because then you’ve got to sell it.

Steve Rozenberg: The one thing, Josiah… You kind of said it all, but the one thing I would say that a lot of people don’t factor in when it comes to a management company, the difference between a good one, a bad one, or none, is I think as entrepreneurs we don’t value our time as much as we should. We’re willing to give up our time to do things to do it ourselves. We have heroitis or we can do it better. The thing about a bad property management company is the stress level that you have to deal with because now you’re babysitting the babysitter essentially.

Josiah Smelser: So true.

Steve Rozenberg: A lot of people don’t factor in the mental stress. If you’ve ever had properties that are not being run correctly, which I personally did because I didn’t run them correctly as you know in my book. A lot of times they don’t factor in what is my time worth, and more importantly, what are those sleepless nights worth when you don’t know what you’re going to do. The challenge, I think, about real estate in general is the good thing about it is there’s no rules. You can do whatever you want. You can flip wholesale. You can do BRRRRR. The bad part is there’s no rules. You can flip, wholesale, BRRRRR, and there’s no one to tell you you’re doing it right or wrong until your bank account says zero or you’re in a lawsuit.

Josiah Smelser: Right. Yeah.

Steve Rozenberg: That’s, I think, the challenge, right? When you and I get into a new industry, you came from being a professor, I came from the airline industry, there’s no rule book that says, “Hey, this is what you do. These are the bumpers that you stay in as an investor. Don’t go out of the lines.” There’s no one that tells you that. You look at a house and ask the guy selling it, “Hey, is this a good deal?” He’s going to go, “It’s a good deal. You should buy it.” You buy it, and then he’s like, “Sucker.” He walks away. And now you’re the one… Because we didn’t protect our time. We didn’t do the time before to educate ourselves or we didn’t understand the system around it.

Steve Rozenberg: I think that’s the thing. Alex, you had mentioned earlier about… You guys both talked about communication. I have learned in owning a company the three reasons that you will lose a client is vacancy, maintenance, and communication. If those three… Those are the three. If you’re an owner, if you have a vacancy, you’re losing money. If you have over maintenance, you’re either going to lose the tenant or it’s going to cost you too much because the management company doesn’t know what they’re doing. If you don’t communicate at some level… You can be the best management company in the world, but if you don’t let the client know all the things that you’re doing, they really don’t… They’re like, “Those are great, but it would’ve been nice to know that.”

Steve Rozenberg: I’ve learned those are the three reasons why you lose a client. If you can focus on those three things as a management company, you will do very, very well. Again, not having an answer for an owner is okay as long as you let them know-

Josiah Smelser: Exactly.

Steve Rozenberg: … We’re still working on it. We’ll let you know as soon as we find out. Normally owners are okay with that as long as they don’t think they’re in some black hole of forgetfulness. Because true investors… The difference between a landlord and an investor, the landlord wants to do everything himself. He wants to be the one to run to Home Depot or you would run to Fort Worth and handle this and handle that. An investor sits behind the desk and uses appraisers, inspection teams, management companies, and they leverage the other people and their time. I think that’s the challenge that a lot of people have is they don’t value their time, so they’re leveraging themselves.

Josiah Smelser: Sure.

Steve Rozenberg: I think that’s the reason. I know that I had a problem with understanding leverage initially was how do you scale and understand leverage. The key was you’ve got to be able to push it out there for other people. Your job, Josiah, is you’re the CEO of the company. You have other people doing things, and then you bring that in, I’m assuming, and then you look at the numbers, and you make decisions. And there may be some things that you do, but if you’re just doing it all the time you’re not going to be able to scale. You wouldn’t be able to be in three states owning real estate. You would be in your local neighborhood.

Josiah Smelser: Yeah, absolutely. Absolutely. I know this is an interesting connection to all this. I’m a big Fantasy Football enthusiast. The way I always approach my team is the way… Building my Fantasy Football team is the same way I approach building my real estate portfolio. Continuous improvement. Looking for value. I look for value in the properties I buy, and then I try to continuously improve the properties and continuously improve my processes, continuously improve my portfolio if you will.

Josiah Smelser: Same with the Fantasy Football thing. You get these players when you start. They may not be great, right? But you can improve as you go. That applies to work as well. You’re building your business. Figure out how you can improve continuously, right? Over communicate, keep costs down. Basically just show people you care. You know what I mean?

Steve Rozenberg: I’ve got a question. I know we’re going to finish up here in a little bit, but let me ask you this. You and I met at a Mastermind, so I know that you do these things. What do you do to improve yourself? Doing all these improvements, those are all tools to improve your business. You and I both know it all starts in your head, and it starts with improving your mental positioning.

Josiah Smelser: Yeah, absolutely.

Steve Rozenberg: What do you do?

Josiah Smelser: I read as many different books as I can on these kind of topics, real estate. Basically, improving mindset. There’s a lot of different people out there you can follow that are big on this kind of stuff. I love Gary B, and we were talking about-

Alex Osenenko: We talked about Tim Ferriss, right?

Steve Rozenberg: Yeah, I was talking about Tim Ferriss.

Alex Osenenko: He’s part cop.

Josiah Smelser: Yeah.

Steve Rozenberg: It’s really, really good.

Josiah Smelser: Yeah. Just always figuring out ways you can improve on anything. I need to get healthier. What can I do to do that? I like to keep building my real estate business. What’s not working well? I go back to this example earlier. When we started off we were bottle necked by this seasoning period of six months because our capital would get locked into a deal, and we only had so much capital, so we could only do so many deals a year. Well, once we figured out the hard money piece and the private money piece that opened everything up. That allowed us to be able to do three million a year.

Josiah Smelser: Whereas if we were doing the old route, we wouldn’t be anywhere close to that. It’s figuring out how to improve your process. If you could kind of document your process right now for everything you’re doing and figure out what’s the one thing in that process that’s hanging you up, that’s the thing you need to work on the most. If you can figure that piece out, it’ll open up your business and open up your investing experience.

Steve Rozenberg: Gotcha.

Josiah Smelser: Did that answer your questions?

Steve Rozenberg: It did, it did. Again, everybody has their own processes. I do a lot of audio books. I do a lot of Audible. I try to have conversations with people like you and other people that are successful. Alex and I have a lot of brainstorming conversations. When you’re an investor, it’s a lonely place. The challenge is you quit a 9:00 to 5:00 because you don’t like the people you work for or work with, now you’re working 5:00 to 9:00 basically, 60 hours a day, and they say the person you work for is crazy because you’re that person. And you’re running yourself into the ground for no money.

Steve Rozenberg: A lot of times you’re trading one for the other, and it’s one of those things, be careful what you ask for because you may get it. I think that it’s very hard when you’re an investor and you’re out there trying to figure it out. How do you keep that sanity to know that you’re on track, to know that you’re making ground? Because, again, you’re lucky you have your wife involved in this business with you. She sees what you’re doing. A lot of people don’t have that option. They’re out there working in the garage at nighttime trying to build this model. They’re kind of looked at as crazy by their peers because they’re trying to do something different. It’s tough. It’s a tough place to be.

Josiah Smelser: Yeah. I’ll give a lot of credit to my business partner too. I would much rather own something 50/50 with someone that I have a lot of fun working with and I really care about. My business partner is one of my best friends. We were friends as kids, grew up best friends. We’re doing all this together. He really was a big part of putting money in when we started. I’ve really run point on basically just getting all the deals done, getting the financing set up, getting them leased out and that kind of thing.

Josiah Smelser: I would much rather own three million with a partner than 1.5 million by myself. That’s just how I am. Because to me the joy is in the journey. I want to see him be successful as well. People don’t have partnerships all the time, but if you find the right partner, a partnership is great.

Josiah Smelser: You were asking about improving yourself. Another way is the podcast that I’m doing, The Daily Real Estate Investor. I did the podcast number one to stretch me as a person. Number two, so I could meet people like you, Steve. I met Brandon through my podcast, and we ended up having this real estate Mastermind in Hawaii. It’s been a great way to just grow as a person doing the podcast and then to also share this journey of building a real estate investment portfolio and trying to help other people.

Steve Rozenberg: Yeah, that’s awesome.

Alex Osenenko: All right, guys. This was incredible. I think we can talk… We can all hop into Steve’s flight to Sydney and just talk nonstop for 17 hours, but there is a limit to this particular show. Josiah, it was an immense pleasure to have you on.

Josiah Smelser: Thank you.

Alex Osenenko: I think we’d love to have you if you don’t mind… Would love to invite you back for some other topics to dig deeper into stuff. I think you have amazing knowledge. Tell people what’s your podcast and how they can go find you. We’ll link it up in the notes. Tell us your podcast. Tell us what your book is called again. Tell us how people can find you.

Josiah Smelser: The book is called Dream It and Build It. How to Crush Your Real Estate Investing Goals. It’s basically a book on mindset. It’s got a lot of tips and tricks that I learned along the way, things that have helped me. Things that I’ve learned from others that you can apply to your own real estate investing goals. It can hopefully help you accomplish what you’re going for. That should be out on December… The E-book should be out in December… The hardback should be out January.

Josiah Smelser: The podcast is called The Daily Real Estate Investor Podcast. I had Steve on there as a guest. I work hard to get high quality guests on there and everybody’s sharing about their own journey and experience in real estate. It’s been a lot of fun to do it. I plan to try to keep that going as long as I can. I’m also on Instagram. The handle is @dailyrealestateinvestor. Just spell it all out.

Alex Osenenko: @daily-

Josiah Smelser: Yeah.

Alex Osenenko: Daily real estate investor.

Josiah Smelser: I’d love to connect with everybody. Send me a message. Let me connect with you. I really appreciate you guys having me on the show. It’s been awesome.

Alex Osenenko: Thank you, Josiah. Those of you listening you can find us, Steve and I, and our whole network on Facebook. We are Mastermind Real Estate Investment Club. It’s a private group. Join us. Of course, if you need a manager, a good property manager for your investment properties, hit us up or if you want to buy investment properties, hit us up at mynd.co, M-Y-N-D dot C-O. If you enjoy the show, give us a rating on iTunes. We’re just spinning this thing up. Give us a thumbs up. Let us know you liked it, share it. We’d love you for it until the end of days.

Alex Osenenko: Steve, any parting words?

Steve Rozenberg: No, man. Josiah, as always, buddy, I thank you so much for your time, man. I love learning from you. Thank you for imparting your wisdom on the BRRRRR method for us. I’m sure you and I will be hooking up again very soon, if not in Maui, with Brandon I’m sure somewhere in some part of the world or something, man.

Josiah Smelser: Yeah, man, it’s-

Steve Rozenberg: Thanks again, I appreciate your time, Josiah.

Josiah Smelser: It’s been awesome, guys. I appreciate learning from you guys as well. Yeah, I really appreciate the opportunity to come on the show. I look forward to follow along with you guys as you build this.

Alex Osenenko: Have a great day. Thanks for listening.

Steve Rozenberg: See you guys. Bye-bye.

Josiah Smelser: See you.

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