Ashley:
This is Real Estate Rookie, episode 295.

Paul:
I’m a cashflow buy and hold investor here in Colorado Springs. My wife and I own a few properties. And my day job, I still have a W2 job as a underwriter in corporate banking. And this has definitely helped me in my real estate underwriting and my exotic plant selling side hustle business.

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

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And just like always, we’ve got an amazing story for y’all today. Today we’ve got Paul Lee on the podcast. And Paul’s an investor based out of Denver. He’s up to eight multi-family units right now, or eight units across two multi-family properties. But just really interesting conversation with Paul. We talk about this $100,000 side hustle with exotic plants, we talk about getting rid of PMI. We talk about his job as an underwriter and how it helped him as a real estate investor, just so many, I think, good topics from the conversation with Paul today.

Ashley:
Paul also breaks down the benefits of using leverage. If you are a Dave Ramsey fanatic and you are afraid of getting into more debt, Paul gives some really good talking points as to reasons why leverage can actually be beneficial to you, especially as an investor in trying to grow your wealth.

Tony:
And this was probably one of my favorite parts of the episode, he also talks about how he got a 10% down commercial loan for one of his four units, which is something you don’t typically see. Make sure you listen for that part. And then he also talks about something called the self-sufficiency test, which I had never heard of before. Ash, had you heard of that before?

Ashley:
No, I hadn’t.

Tony:
Yeah, it was brand new information for me and Ashley, so I love when we as the host get to learn something new. Just overall the really amazing conversation with Paul. But as always, I also want to give a shout-out to someone who gave us a five star review on Apple Podcasts. This person goes by the name Dr. Goldstein 79. And Dr. Goldstein says, “Informative and motivational. The show is so great. They cover a wide range of real estate investing topics in an accessible way. Episode 273 specifically inspired me to try something new. Two months later, I’ve closed on a deal, and I’m excited to get going. Thank you, Ashley and Tony.” Dr. Goldstein, kudos to you for listening and then two months later actually taking action. That’s the whole purpose of our podcast is to motivate and inspire. If you are part of the rookie community or you’ve gained any value from our podcast, please take a few minutes and leave us an honest rating review on Apple Podcasts or Spotify or wherever you listen. The more reviews we get, the more folks we can reach, and reaching folks helps us help people, which is what we love doing.

Ashley:
Before we do bring Paul onto the show, I do have a little boring banter for you, Tony. I think we should start to incorporate a segment where it’s called Guess the Size of Tony’s Baby. What Object is similar in size? I was scrolling social media this morning and I saw the cutest posts ever of Tony making little tiny diapers to put on a fruit for their display and their kitchen. Everybody think to yourself real quick, what size of a fruit do you think is Tony’s baby right now? And then Tony, you’re going to give the answer.

Tony:
It’s the size of a banana right there.

Ashley:
Yay.

Tony:
We got a little banana baby sitting on our island right now. But all those little apps, we’ve got the apps to say how your baby’s the size of a blank this week. And for whatever reason, our app always talks in terms of fruits, so every week we’ve been buying different fruits. And the bananas the biggest one, so yeah, me and Sarah get a little creative with the island display every week.

Ashley:
And I know you put it on your Instagram, but I don’t think you have told our listeners as to what you are having.

Tony:
Oh, yeah. Me and Sarah are having a baby girl, so the first girl in the family, so we’re super excited. We have our 15-year-old son. And I was not hoping, but I was mentally preparing for another boy just because I’ve already done that; I know what it’s like to raise a boy. And then when I found out that we were having a girl, I was like, “Oh my God, I got to learn a whole new style of parenting to do this the right way.” We’re excited.

Ashley:
Well, congratulations, Tony, to you and Sarah. I’m also super excited too, to have a little cute little girl co-host come on and grab the mic and take over from you every once in a while.

Tony:
Yeah, it’ll be a good time. We’re excited for it.

Ashley:
Well, Paul, welcome to the show. Can you start off telling everyone a little bit about yourself and how you got started in real estate?

Paul:
Yeah, absolutely. Well, first and foremost, Ashley and Tony, thanks for having me on here. I’m a huge fan. I always listen to you guys when I’m working on the property. But a little bit about me, I’m a cashflow buy and hold investor here in Colorado Springs. My wife and I own a few properties. And my day job, I still have a W2 job as a underwriter in corporate banking. And this has definitely helped me in my real estate underwriting and my exotic plant selling side hustle business, which we can get into later.

Ashley:
I am very anxious to hear about that.

Tony:
Paul, let me ask, man, just before we get too far into the weeds here, what does your portfolio look like today? You and your wife have a few properties. What does that look like?

Paul:
Yeah, so we have eight units and comprising of two properties, two quadplexes. And our main strategy is house hacking. And we can get more in the weeds later, but the first property we house hacked, and the second property we ended up using a investment property portfolio loan from a credit union, and we were able to put 10% down.

Ashley:
Let’s go back to when all of this started as to what were you doing in your life where you decided that you wanted to make additional income?

Paul:
Yeah. I guess going back, I was always surrounded by real estate growing up. My dad and my uncles all invested in real estate. And I had a core memory at a young age of going to one of his commercial properties, seeing something huge and tangible, and saying, “I want to do this when I grow up.”
But that being said, I did have a rejection phase in college in high school. And I think this was after or during the great housing recession where I would say, “Real estate’s too risky. I don’t want to be a landlord,” things of that nature. And I really had the middle class mindset of going to college, focus on getting a good job, retiring in 30 years.
What really got me interested in real estate and these side hustles was during COVID I had three realizations where we only had one income stream at that time, which is my W2 job. And as much as you’re loyal to a company or your workplace, you’re just another line in their profit and loss statement, and they can just fire you and you’re out of income. And then as you get farther up in a company, you’re more entrenched and you’re more involved so there’s more time investment that’s required. I wanted freedom from a time perspective as well as more income streams. And at that time we were still renting, only had one income. And during COVID, the interest rates were so low that it just made sense to go into in real estate. And, yeah, the plant side selling hustle is just some random arbitrage opportunity I came across.

Tony:
Yeah, we got to get into the plant hustle there, but before we do, you mentioned something about the risk associated with having a single source of income. And I think that’s something that a lot of new investors and just people in general, they don’t comprehend very well that just because you have a W2 job doesn’t necessarily mean that you are secure.
I just Googled tech layoffs 2023, and it shows me by month all the big tech companies, how many people were laid off every single month. And in April, there were 17,900 people laid off from big tech in April. March, 37,000 people were laid off across big tech in March. February, 36,000 people laid off from tech in February. January, 85,000 people laid off in the month of January this year. Just because we go to school, just because we get a degree, just because we get a job at this big, well-known company, that doesn’t necessarily mean that you are secure. And I think for most people, one of the responsible things you can do for yourself is build that secondary source of income. Paul, I’m just happy to hear you say that. I just wanted to reiterate that point for all of our Rookie listeners as well.

Paul:
Yeah, absolutely. And yeah, I was looking at multiple sources of income. Real estate, it’s funny that when I was growing up, I saw it as a risky investment, but as I got older, I saw it as more of a safety net, a cash flowing real estate property. Yeah, definitely.

Tony:
Just really quick, Ash, obviously economy’s all over the place right now and some industries, some asset class are getting hit harder than others. How are your long-term rentals doing? Are you pretty steady year over year? Are you seeing things go up, go down? What has it been like for you?

Ashley:
For at least the price of rents have increased so much. We’ve seen that. But lately, I feel like they’ve been stagnant. There isn’t a lot of room for growth. But we just had three vacancies. And as soon as they were listed, they were rented. And two of them moved in within a week, and then the other one is moving in tomorrow, which would be two weeks from when it was listed. But also, I’m more affordable housing, I don’t really have any luxury high-end units either, and I think that makes a big difference too.

Tony:
Interesting. Yeah, only reason I ask, some of our properties are up year over year, but some of our markets are down year over year, so we’re curious to see how 2023 is going to finish out. But Paul, sorry, I didn’t mean to get you off track there, brother. Let’s get back to you in your story, man. You go on this journey, you said, during COVID. And what happens from there?

Paul:
Yeah, so before real estate, I was selling plants. And, yeah, so I guess I can get into the plants selling how I ended up that there and why I decided from plants it was a profitable business… From plants, why I decided to get into real estate. We were all mandated to sand doors during COVID, and if you looked on your social media feeds, there were plants. People wanted to make their interior home look better because they were all working from home, so I was part of that wave. The first plant that I was interested in was a philodendron gloriosum.

Ashley:
Oh yeah, I know what that is.

Tony:
That sounds like a spell from Harry Potter or something. But I’m glad you said the name, Paul, because we should probably just clarify for listeners that when you say, “Hey, I’m selling plants and I live in Colorado,” people might think of a certain kind of plant. But Paul’s not a drug dealer, guys, so we should just say that these are just household plants.

Paul:
Right, right. Disclaimer. Yeah, not plants you find in Walmart or Home Depot, really exotic, rare plants. But yeah, I was looking for this plant online, and the lowest price was from a wholesaler from South America. Ordered that plant, and I must have fat fingered the order. I ordered two. As much as I love to keep two of these rare plants, I wanted to sell it. And I listed it online, and it sold for two to three times what I purchased it for. I was like, “There’s a great arbitrage opportunity here.”
And I linked an article from Wall Street Journal saying, “Forget the stock market, the rare plant market is going bonkers.” I saw this opportunity, I reached out to this wholesaler multiple times, had a large stock. And this flipping of plant, you’re not just purchasing these plants and selling them the next day, because they’re being shipped and exported, you have to rehab it. You have to take care of it, make it sustainable for the next person. And so that’s the value that I added to the process.
And I saw that rare plants, they’re not going to stay this… The prices aren’t going to stay this high forever. No one’s going to pay $2,000 for three leaves. Objectively, I was standing back and looking at this. No matter how beautiful. I was like, “Okay, this is a bit trendy. What can I go into that’s stood the test of time?” And that was real estate. And at that time, interest rates were… I got an FHA loan for my first property; it was 2.75%. I was like, “This is a no-brainer. I’m paying rent. There’s this opportunity; I’m going to go for it.”

Ashley:
Paul, I have to ask, was this plant business lucrative? And how much did you end up making off of it? And did you use that to fuel your real estate investing?

Paul:
Yeah, so I looked at my profits the other night. I made about $100,000 net profit to date.

Ashley:
Wow. How long of a period was this? A couple years?

Paul:
This was two years.

Ashley:
Wow, that’s awesome.

Paul:
Yeah. I sold 381 plants. On average each plant was about $400, and the profit on each plant was about $262. Quite lucrative.

Tony:
Isn’t it wild all the different side hustles? Paul, we just did a side hustle show that aired not too long ago, and we had previous guests from the podcast. One of our guests, he drove DoorDash and Uber Eats but had a really sophisticated system for maximizing his revenue. But then one of the other guests, she was couch flipping. And same thing, she was finding couches at a really low price and then just re-flipping them to other buyers. And you’re basically doing the same thing but with exotic plants. And it just goes to show that there are so many ways to make money that the ability to generate additional revenue, it’s all based on how creative can you get? And if you’re not able to generate that additional revenue, it’s not because it’s not possible, it’s just because your eyes aren’t opened wide enough to the opportunities.

Paul:
Oh yeah, 100%. There’s so many opportunities out there. And instead of saying that you can’t make this or you don’t have enough money, go pick up a side hustle, whether that’s DoorDash, sell exotic plants, you know?

Tony:
Yeah. And just to call for our Rookie audience, it was show 294 where we had our guests talking about their different side hustles. If you want to find some additional ways to make some money to fuel your real estate business, obviously exotic plants is one avenue, but if you want to go back and listen to our other guests, you can check out 294.

Ashley:
Which was just the episode we did this past Saturday it was released, so I think not too far to go back. Okay, Paul, I’m interested in now that you’ve decided you want to get into real estate because that is more of a long term side hustle for you, was your wife always on board with this? Tell me how you guys built this real estate portfolio together. Where did you start with it?

Paul:
Yeah. I will say that my wife is super supportive in everything I do. When I first brought up selling exotic plants, she was puzzled. But as far as real estate, she was on board, which is extremely important for your significant to be on board. But, yeah, she was always on board. And nowadays, she does the property management side of things, so we do self-manage our properties, and she handles the day-to-day communications. Yeah.

Ashley:
With the property management, is that something you knew from the beginning that you wanted to do, to self-manage it? I definitely want to dive into some of your deals and everything, but with the property management, how did you decide that you guys wanted to self-manage? And maybe you can give us a glimpse into how that business actually works for you.

Paul:
Yeah. I did not always know that we were going to self-manage our properties. When I was modeling for these real estate investments, I included a property management fee into my modeling, but it naturally came because I wanted to do the repairs myself. I enjoy doing the repairs. Coming from a corporate life, I didn’t know how to change a garbage disposal, a water heater, so I would find myself YouTubing these things. When the opportunity presented itself, I was like, “Okay, I’m going to do this. I want to find my tenants. I want to screen.” And especially since I’m owner occupying the property, I want to make sure I have good tenants. And I’m not saying that property managers don’t care about the tenants they put into the property, but you’re invested into this property; you will always care more than the property manager. We found ourselves self-managing naturally. I think eventually, as our portfolio scales, we’re going to eventually hire a property manager. But we’re at that point where we have enough units that it’s manageable by us.

Tony:
You said your wife is leading the property management piece for you guys. Did she have experience related to property management at all in her W2 career? Or were there any skills in what she was doing before that translated to the property management?

Paul:
No. She did not have property management experience prior. Her most recent jobs were customers service facing positions. But that in itself is extremely transferable to property management because I firmly believe that being a property manager and landlording is a customer service focused business. You want to be responsive to your tenants, you want to make sure you schedule the repairs on time. That really separates the landlords from the slumlords, if you will.

Tony:
And then what about for you, Paul? You talked a little bit about you being an underwriter. I would think that there’s probably some overlap there between that W2 job and what you do as a real estate investor. But I guess just walk us through how do you feel your day job has set you up to be a better investor?

Paul:
Yeah, so being an underwriter has definitely helped.

Tony:
Before you even answer that, can you just define what is an underwriter? For Rookies that don’t know what that word is, what is someone who underwrites?

Paul:
Yeah, so an underwriter is someone that looks at all the information. For example, I’m a corporate business underwriter, so the lender will bring in financials, the opportunity in front of me, and then I underwrite the property, I do the modeling and I make sure the company can cashflow with the loan that we’re proposing to give to them.
I analyze the company from a top down perspective, so my W2 job has definitely prepared me for real estate as well as my side ventures. An underwriter is essentially someone that looks at all the financials and all the numbers and the nitty-gritty down to the weeds. And my job is to essentially determine if we should move forward with this opportunity based on my financial modeling and my research or if we should reject a company for a loan.
In this mortgage process, you’ll have the mortgage lender that makes the relationships, reaches out to the borrowers. They make the connections, go to net networking events, and then they hand off the package with the financials to the underwriter. And that’s when they determine does this guy pass the sniff test? Should we give a loan to them?

Tony:
Paul, just for my own understanding, as an underwriter, are there certain either state or federal guidelines around what underwriting looks like? Or is it more so subjective based on the individual underwriter?

Paul:
Yeah, so for the residential mortgage side of things, if you go and Google Fannie and Freddie Mae lending matrix, there are firm guidelines as to how much a borrower has to put down for a specific type of property. But on the corporate level, I think it’s more flexible there. I’m not too sure. I’m sure there’s some banking regulations that we have to adhere by, but off the top of my head, yeah, can’t think of any.

Ashley:
Paul, do you want to take us through your first deal as to what that looked like?

Paul:
Absolutely. The first deal I got through a commercial broker. It was off market. And we used an FHA loan; put 5% down. And like I said, the interest rate was 2.75%. Their purchase price was $650,000.

Ashley:
Paul, before you go any further, I just want to find out, you said it very nonchalant as to use a commercial broker, it was off-market deal. Explain that a little more. How do you get that, especially for your first deal?

Paul:
Yeah, it’s actually a funny story and a learning lesson for me. When I first started, I didn’t know who to reach out to or what to do so I just went to a plain vanilla realtor, a single family home realtor, and I was like, “I’m looking to house hack a small multifamily property. Can you help me?” And she was like, “Of course I can.” And then later, I looked at her track record and she only sold single family homes. Getting back to the story, she said, “Of course I can.”
And throughout the process, I found that she had some skills that were lacking and I was finding all these properties. I was going through LoopNet, I was running the numbers. I was bringing them to her, and she was basically writing the offer. Now, I’m not saying she was a bad realtor, but for my purpose, she was not a good fit. We offered on a property. Eventually, we offered on a property, a commercial property in Colorado Springs. We lost out, but I reached out to the broker that listed the property, and that’s how I got connected to him.

Ashley:
Paul, that scenario you gave I think can resonate with a lot of people, including Tony and I where we have asked the wrong question. And one thing that I thought of right away when you asked her if she could help you with that is we’ve had guests on that say it perfectly as to they learned that you’re asking questions the wrong way. You should be asking how many investors have you worked with? How many multifamily deals have you closed? Because a lot of times people just want your business, they’re going to say, “Yes, of course I can help you.” I just wanted our listeners to know that is one way that you guys can avoid mistakes that we’ve had is by making sure you are asking the right questions.

Tony:
Yeah. It’s almost like going into a car lot and asking the car salesman, “Is today a good day to buy a car?” The answer’s always going to be yes; it doesn’t matter what’s going on. But Paul, continue, though. You got connected with this broker, this deal that you were working on. What happens from there? Well, first, I think a lot of new investors do exactly what you did is that they don’t even realize that there is a difference between someone who focuses on residential and commercial. Once you got introduced to this commercial broker, what was that dialogue like? How did you get to a point where, I don’t know, they were taking you seriously as this person that had never done any real estate transaction before?

Paul:
Yeah. I think they took me seriously just because they saw that I did submit an offer on the property, so that in itself shows that I was making offers, so off the bat, he knew I was serious. But just seeing what his company does, they underwrite. Well, they don’t underwrite, but they make models of these commercial properties. They try to reach out and get off market contacts. And they’re living and breathing small multifamily and commercial properties day in and day out. When I was speaking to them on what I was doing, he was asking the questions that I really knew that he knew what he was talking about. He was asking me, “What are you looking for? What’s your strategy? What’s your buy box?” I knew that he knew his stuff. And, yeah, it was just as easy as that.
And the first property I bought with him, he was representing myself as well as a seller so he was limited on how much he could help me because he is representing both of us. That’s where my underwriting skills definitely had to kick into high gear because I had to be sure of my numbers, I had to be sure of the property, the location. And, yeah, thankfully everything worked out.

Tony:
Yeah. When you say be sure of the numbers, be sure of the location, is that where your W2 skills as an underwriter helped facilitate that? I guess walk us through what you took from your day job that you applied to your analysis of that first commercial property.

Paul:
Yeah. When a commercial broker presents in property to you or a rookie, they’ll show what the trailing 12 financials are, how the company has performed, as well as proforma figures, proforma rents. You can take those proforma rents into consideration, but what I like to do is take it a step further and see what the people around, what they’re renting at.
And a really great app that I use as Rentometer to see what rents these units are getting. And I even take it a step further. I go to each of the data inputs on Rentometer, I see what the unit looks like, what kind of property it is. Do I think that I can achieve that? In short, my skills as an underwriter, I take a more conservative approach as far as vacancy, allowance, repairs. And if it works at that point, I’m not hesitating to pull the trigger on the property.

Tony:
On that first multifamily, you said it was four units, correct?

Paul:
Yes.

Tony:
And your goal was to house hack of this. Now, you said you went with an FHA loan. For folks that maybe aren’t familiar, how does an FHA loan differ from other types of financing?

Paul:
Yeah, so an FHA loan, to summarize, is a more lenient loan offered by the government. It essentially tries to get more people into owning houses. They have a lower down payment requirement, their credit score threshold is lower, their debt to income thresholds are higher. The goal of an FHA program is to get first time home buyers into the home and to be able to purchase a home, to be able to purchase a home.

Ashley:
What are some of the things that you need to do to prepare to get an FHA loan or that maybe you need to be mindful of during the process where maybe if you’re getting a conventional loan, you don’t need to know?

Paul:
Yeah. For an FHA loan, it’s pretty much the same as getting a conventional loan as far as you have to provide your tax returns, your source of income. From that standpoint, it’s completely the same. But there are specific things that rookies and real estate investors that are looking to owner occupy have to be mindful of. This nugget is extremely important for rookies that are starting out. But if you’re using an FHA loan to house hack a triplex or a fourplex, you have to be mindful of the FHA self-sufficiency test.

Ashley:
I don’t think we’ve ever talked about that on here, Paul.

Tony:
Yeah, I’ve never heard about that.

Paul:
Yeah, so if you do a quick scan of this, you’ll see me harping on all the Reddit and social media is about the FHA self-sufficiency test. But basically what it says is that, again, this only applies if you’re using an FHA loan to own or occupy a triplex and a fourplex, but essentially does 100… Does 75% of the gross rents… And these gross rents are determined by an appraiser. Does that pass the pity payments or does that exceed the pity payments? Principle interest, taxes, and insurance. This test doesn’t look at the borrower, how much income they make, what their debt is, they’re really just looking at the property itself and seeing if it’s self-sufficient because the FHA knows that when people are owner occupying a triplex or fourplex that eventually you’re going to move on, so will the property be self-sufficient on itself?

Ashley:
You said you posted this on Reddit?

Paul:
Yeah.

Ashley:
How is that information received?

Paul:
Yeah, so I posted this on Reddit. And the reason why I’m saying this on all the forms is because you’ll see real estate gurus say that all you have to do is use an FHA loan, house hack a fourplex and you’re golden. But that’s not really the case. There’s little nuances that someone that has been through the process understands. I posted this on Reddit, and a lot of people were thanking me as well as saying, “I’ve encountered this in my closing process.”
Now, there’s two ways to remedy this, two possible ways. One, the borrower can counter the appraiser’s determine market rents with their own analysis, and they can say, “These rents are what I believe, based on my analysis, what I believe market rents are.” And then two, they can also pay down the loan or put more equity into the property to lower the debt payments. But at a certain point, you have to really juggle between putting 20% down FHA loan versus conventional, especially with PMI payments that an FHA loan typically has.

Ashley:
Do you think that part of the reason you figured this out is because of your underwriting background? Or is this something that no matter who’s doing it, they’re going to eventually figure out?

Paul:
Yeah. I think it’s both. I think someone that encounters this, they can just be saying, “Huh, that’s weird. Okay, next. I’m just going to use a conventional loaner.” Brush this off. But for me, there’s nowhere that… Or not a lot of social media outlets and podcasts talk about this, like I said, so I think it’s one where I caught this. And because house hacking is a strategy that I plan to use in the future, I’m also mindful of this and I want to tell all the rookies that, hey, you need to screen for this before you even get on your contract on a property, on a triplex or fourplex.

Tony:
Yeah, Paul, I guess what I’m curious about is how can we give our listeners maybe a tip on, hey, here’s how to find the potential pitfalls in your own deal? How’d find out about this self-sufficiency test? Was it your lender who came across it? Were you doing your own research about the FHA? How did you uncover this potential landmine?

Paul:
Yeah. Funny enough, the lender that I was working with, I told him the strategy that I was going to use, house hacking, using an FHA loan. We found a fourplex and he said, “Oh yeah, we can definitely do this.” He sent the package to the underwriter and she pointed out that this does not pass the self-sufficiency test. It was really the underwriter that pointed out.
To your question how can rookies figure out the pitfalls? I would say speak to people that are breathing this day in and day out. That could be an FHA lender versus a lender that does FHA conventional everything under the sun. And speak to professionals. I will say that during my journey of searching for a lender and realtor, I’ve noticed that a lot of people will say things that they don’t fully understand, but they want your business, like we discussed, so they’ll say, “Of course you can do this, of course we can do that.” But in actuality, that’s not always the case.

Tony:
So you go through the hoops, you’re able to close on this fourplex. Can we get some numbers on this deal, Paul? Because I’m curious to see how it actually worked out for you, man. What was the purchase price from that first fourplex?

Paul:
Yeah, so the initial purchase price was $650,000. I put 5%.

Tony:
Pretty good.

Paul:
Oh, yeah. Well, now it seems great, but at the time and the state of the property, I thought I was overpaying. This was back in April 2021. $650,000, 5% down as down payment, 2.75% interest rate. From the get go, using the broker’s figures as well as my own analysis, cashflow was going to be extremely slim. But because I was putting such a small amount as a down payment, the IRR, internal rate of return, my returns were off the charts.
Because I was renting at the time, I didn’t mind the smaller down payment, I just wanted something that I could own. And because of the crazy inflation during COVID, rents jumped up, the whole market around 30% to the point where I was cash flowing I want to say $1,300 at the time with an FHA loan. I was living in it for free, but if I moved out, I would cash flow $1,300 a month.

Tony:
That’s amazing, man. And then, you bought in 2021. We all know what the market has done since then. You bought it at $650,000. What do you think that fourplex is worth today?

Paul:
Yeah. Actually, in August of 2022, I took out a HELOC and the property was appraised for $950,000. And yeah, I found the property right next to me that looked identical sold for $900,000 to some estate investor. But, yeah, I was stunned. And I’m still shocked to this day. It just doesn’t feel real.

Ashley:
That’s awesome. That’s super cool.

Paul:
And I also refinanced that property into a conventional loan to get rid of that FHA PMI, so now it cash flows $2,000 a month. Yeah. And we’re able to use the FHA loan again.

Ashley:
That’s something I don’t think we talk about enough too is getting rid of that PMI and making sure that you’re staying on top of that. And if you’re have that much appreciation in that short of time, you can definitely get that PMI taken off because it’s, what, 75% of what the loan to value is, as long as it’s under that threshold. Do you know off the hand, Paul, what that percentage is? Or is it even 80%?

Tony:
I think it’s 80. At least I’m pretty sure it is in California. Because I did it for my primary residence here, and it was 80%.

Paul:
FHA puts out this list on if it’s below this down payment amount, it’s this percent. I want to say it was 0.8% of the total loan, and then that’s per month. Yeah.

Ashley:
You went ahead and just refinanced into a different loan, but what if you were going to keep the same loan? What are the steps someone would do to find out if it is time that they can get the PMI removed?

Paul:
Yeah. I guess this is a little difficult. Going back, I guess you can reach out to an appraiser to see if they can do just a computer appraisal and figure out what they think the value is of the property. And, yeah, you can pull comps yourself and figure out based on the quality of your property and all the renovations you’ve done what you think the property’s worth. And if it crosses the threshold you’re looking for, whether it’s a refinance or cash out refi, if that’s feasible.
But yeah, to your point, I know a couple people that have homes that they purchase with less than 20% down and they’re still paying PMI because they didn’t know that they can refinance and get rid of that. I tell them all the time, “Because of inflation, your property has skyrocketed and your equity has increased, so you should probably look into that.” But now with where rates are, I don’t know if that’s the best idea.

Tony:
But the other option too, Paul, and this is what I was saying we did for our primary residence, is you don’t even necessarily have to refinance, but if you go to your current lender and you say, “Hey, I believe that either, A, my loan balance has decreased or my property value, B, has increased enough so that I have at least 20% equity in the property,” they’ll remove PMI for you. For me, when I did it on my primary residence, I called my lender, I said, “Hey, my home has appreciated a ton in value. I’ve paid down the loan balance a bit as well. Can you please reassess what you think my property is worth and tell me what percent my loan balance is in comparison to the new appraised value?” And they don’t send out… Actually, I think they did send out an actual appraiser when they did this. And then when they got the new appraised value back, they said, “Yep, Tony, your loan balance is less than 80% of your appraised value. We’re going to take off your PMI.” And just like that, I dropped, I don’t know, I think it was $300-something dollars off my payment every month for my primary residence.
For all of you guys that are listening, if you feel that you have that margin there now if you feel like you have that spread there, just call your lender and ask them, “Hey, I want to get rid of my PMI.” And then they’ll go through the steps to get rid of it. And think about it from the lender’s perspective; they’d rather take off that PMI than lose your loan altogether with you refinancing with someone else, so most lenders, I think, are going to be open to doing that for you.

Ashley:
Paul, before we move into our segments here, I wanted to ask you, coming from an underwriter and just an experienced investor using different types of loans, what are the benefits of using leverage? What would you say to our Rookie listeners as to why they should consider leverage?

Paul:
Yeah, so I think the benefits of leverage… In simple terms, you’re using someone else’s money. The banks are giving you money at favorable interest rates, and you don’t have to come out and buy a fourplex for $650,000 cash, you can use leverage. And that in itself juices up returns because you’re using someone else’s money.
This is what private equity firms do when they do leveraged buyout, they try to put as little equity into the company as possible and they try to use as much bank debt as possible with the intentions of making the company more efficient, more profitable so they can cash out refi in the future or sell it to another company. And I think of myself as a less intelligent but still a private equity fund or firm where I’m buying these properties with as little money as possible down using lots of leverage and then getting better tenants, renovating so I can get higher rents with the intention that in the future I can get higher cash flow, I can cash out refi. The benefits of leverage is, again, you’re using someone else’s money instead of your own, so you can, yeah, put your own equity into multiple properties.

Tony:
Paul, let’s talk about how you financed that second fourplex. We know the first one was The House Act FHA. Did you reuse your FHA for the second one since you refinanced the first one, or was it a different funding source?

Paul:
Yeah, so the second property is where I really learned about the FHA self-sufficiency test. My goal was to use the FHA loan again to buy this property, but at that point I spoke with multiple lenders with all their loan products, just in case, I actually don’t know why, but I just wanted to see what else was out there. But I wanted to use the FHA loan for this property. It didn’t pass the self-sufficiency test. I had this other lender, it’s a credit union in Utah, they had a 10% down portfolio loan that they were going to give me. And thankfully, I ran the property with multiple different financing scenarios where I was able to quickly say, “Yeah, let’s do it.” And yeah, I was able to run the numbers, it worked, so yeah, I was able to close on that using that property or that loan.

Tony:
A couple follow up questions. You’re in Colorado, right? That’s where you live?

Paul:
Yeah.

Tony:
And you said that you found a credit union in Utah. Help us understand how you found this credit union in a totally different state.

Paul:
Yeah. It’s strange. There’s this company, it’s called Academy Mortgage. They connect buyers in the region with the financing products of this credit union. I don’t really know the intricacies of why they do it that way, but yeah, it’s been huge for me to get this 10% down portfolio loan for a fourplex. That’s unheard of just because a conventional loan, you have to put 20%, 25% down even if you’re owner occupying.

Ashley:
Are you giving the information on the deal before they match you with that loan product? Is that bank looking and saying, “You know what? We’ll only do 10% down because it’s such a great deal, and we believe that they’re getting it… The purchase prices below market value.” Because I have seen that before where someone will walk into their local bank and say, “I have this property, I can get it for $300,000, but if you look at these comps, it’s actually as is worth $400,000. Will you only let me put 10% down?” Was it a situation like that? Or this was just a loan product that was offered no matter what the deal looked like?

Paul:
I didn’t send them my models or anything. They were looking at me as a borrower, so they were looking at my income, my debts. And yeah, I think your credit score had to be pretty strong, so above a, I want to say 750 to get this product. But yeah, they were only looking at me as a borrower.

Ashley:
Well, your social media is about to be flooded with people asking for this contact.

Paul:
Yeah. I try to keep it hidden. I use a broker, and I told him that I was using this product, I’m like, “Please keep it under the blankets and not tell anyone.” And he told to everyone, and I think they’re swamped with business right now.

Tony:
That’s amazing, man. Cool. Well, kudos to you, man. And Ashley and I talk about this a lot on the podcast too is where sometimes you get the best loan product not by necessarily asking for a specific type of loan but just explaining what your situation and what your goals are and then putting it on your mortgage broker or your lender to find the loan product that best suits your unique situation. And, Paul, it sounds like you got a killer loan product with that, man. 10% down on a fourplex is pretty damn good, man, so kudos to you, brother.
All right, so let’s jump into our Rookie request line. And for all of our Rookies that are listening, if you’d like to get your question featured on the show, head over to biggerpockets.com/reply. That’s biggerpockets.com/reply. And if you got a good question, we might just feature it on the show. Paul, are you ready for today’s question?

Paul:
Let’s do it.

Jeff:
Ashley and Tony, thanks so much for everything you do. Huge fan of the show. My name is Jeff Palmer. I live in Truckee, California. My question for you is around the HELOC. I have substantial equity in my primary residence, and I’m pulling a HELOC right now and debating whether or not I should be using that money just for something on the shorter term like a bur deal or if it might be all right to put that money toward a longer term deal like a long term rental or even a short term rental. Thanks so much.

Paul:
I want to say that typically when you’re taking money from a HELOC, it’s better to use it for short term purposes just because there’s that floating rate component. And we don’t know where rates are going to go so I would say I would be most comfortable with a flip or a bur. But it can also work for a long-term rental. Just so you know that you know can get that deal under wraps and you can quickly refinance a year or two down the line into another loan product. It can be used for a long term investment, but you have to be really sure that you can refinance that into another product.

Tony:
Yeah. No, I feel like I’m got a pretty high risk tolerance, but I don’t think I’d want to use a HELOC for something where it’s tied up for too long. Cool, Paul. Well, let’s jump to our next segment here, which is the rookie exam. These are the three most important questions anyone will ever ask you in your life. Are you ready for question number one?

Paul:
Yeah, absolutely.

Tony:
All right, first question, what’s one actionable thing Rookies should do after listening to your episode?

Paul:
Yeah, so I would say take an evaluation of your portfolio as well as your personal finances and understand where the risks are and where your advantages are. To clarify, would a major repair wipe your cash reserves out? If that’s the case, you know, have to build up more cash reserves. You have access to HELOC for this repair. Are you like me and you rely on one income? What are some other sources of income that you can bring in?
And another one could be… I was talking about my wife and how she handles the property manager side. I like to DIY, all my renovations, and my father-in-law’s a general contractor, a commercial general contractor, and he’s helped me out on a lot of my renovations because watching YouTube videos only takes you so far, so having your team to fill in where you’re weak on or you’re not as good with, that’s a risk. And also, your advantages. Are you in the position to be able to house hack? People with bigger families, it might be harder. But if you’re young and you don’t have a family and you’re able to house hack, that’s a huge advantage. And once you find that advantage, you should hit it hard. We try to house hack, that’s our strategy going forward because we’re in that position, but eventually our family’s going to grow and we’re not going to be able to move around, so for the time being, we’re hitting that hard.
And if you can’t house hack, do you have access to capital? Do you have more money to the point where you can just cash flow with just using an investment property loan? Really knowing the risks and advantages as it pertains to your real estate and your personal finances is important.

Ashley:
Great advice, Paul. Our next question is what is one tool, software, app, or system in your business that you use?

Paul:
Yeah, so like I mentioned, I like to use apartments… or sorry, Rentometer to determine market rents of an area when I’m looking at a potential real estate investment as well as if I’m in a position where I can raise rents, what are other people getting? And it’s a great tool because it shows you the data inputs of what they’re using so you can see how far back this data is. If it’s two years old, then you probably don’t want to consider it. If it’s something that was listed a few months ago, maybe that’s comparable.
Another one I use is apartments.com, which is grade for investors that are self-managing. You can set up auto… Or tenants can set up auto pay, you can post the executed lease agreement so if they have any questions, they can pull that up and really look at where I’m quoting. If I say like Section eight says something about pets, they can see it. Yeah, Rentometer and apartments.com for sure.

Tony:
All right, and last question for you, Paul, where do you plan on being five years from now?

Paul:
I want to say that I see myself in the near term purchasing more small multifamily. I do eventually want to get into different flavors of real estate, so commercial properties, five units and above, short term rentals, industrial real estate. I also want to look at other businesses, so self storage, car washes; I’ve been looking at that. But yeah, in five years I want to be able to fully support or fully replace my W2 income with these kind of streams of income. And I have no intentions of quitting in the future or living off this income because I like my job, I like what I’m doing. I really just want to have that safety net where if I do lose my job, I can still support my family.

Tony:
Love it, man. All right, before we wrap things up, I want to give a shout-out to this week’s Rookie Rockstar. And this week’s rockstar is Tiara Savvy. And Tiara says, “I’m excited to share that we closed on our second investment property. We’ve fallen in love with real estate investing and are excited to continue growing our portfolio. Huge thanks to the BiggerPockets community. We’ve learned so much through reading about other people’s experiences and getting insightful feedback from other investors.” Tiara, congratulations to you on property number two.

Ashley:
Yeah, awesome job. And thank you so much for sharing. If you guys would like to be our Rookie Rockstar, you can slide into mine or Tony’s DMs on Instagram or you can hop over to the Real Estate Rookie Facebook group. And you can leave us a question at biggerpockets.com/reply.
Paul, thank you so much for joining us today. We really appreciate you taking the time to come on here and share your story and share your knowledge. Can you please let everyone know where they can reach out to you and find out some more information about you?

Paul:
Yeah, you can find me on the BiggerPockets forums, or I also have a Instagram account called Leaf Investments, L-E-A-F. But yeah, thanks for having me on. It’s been super fun. And thanks, Tony, for clarifying I’m not a drug dealer.

Tony:
My pleasure.

Ashley:
Well, Paul, thank you so much. We really appreciate it. And one last thing, before we end today’s show, I want to give a shout-out to an Instagram account. We’ve been doing this every once in a while, and I want to continue to do it so you guys have more real estate investors. And maybe not even investors, just people who can help you with life in general or even business skills, things along those lines. This week’s shout-out is going to go to Coach Chad Carson. He’s actually written a book too for BiggerPockets, but a post that stood out to me, he wrote, “I currently work two hours per week on my rental properties. They reproduce most of my income. Earlier, it was a lot more of my time. Rentals begin like a startup, big effort and end up like a blue chip stock. Very passive. I still love to work but only on passion projects and on my time.” Coach Chad Carson, he posts a lot of information about rental properties and how you can purchase your own and what he does to manage his, so make sure you give him a follow. I’m Ashley at Wealth Farm Rentals and he’s Tony at Tony J. Robinson. And we will be back on Saturday with a Rookie Reply.