Ashley Kehr:
This is Real Estate Rookie, episode 137.

Sterling Shrout:
I never expected to get into real estate, I didn’t think that was something I could do. I didn’t think that was obtainable. And then running into a BiggerPockets podcast from a Google search, and starting to get educated, started to realize that there maybe an avenue for me to get in. That’s what got me here today.

Ashley Kehr:
My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson. What’s going on today, Tony?

Tony Robinson:
Ashley Kehr, what’s going on? How’re you doing?

Ashley Kehr:
I asked you first.

Tony Robinson:
What’s going on with me? Let me see. Did I already talk about us surprising my son for winning ASB president?

Ashley Kehr:
You didn’t tell us how it happened, you told us you were going to do it, but not how it went.

Tony Robinson:
Earlier this week, we found out that my son, who was running for eighth grade ASB class president, we found out that he won. So my wife and I decided to pick him up with a limo. We picked him and his friends up, surprised him at school. It was such a great time. All the kids come out of school, they were like, “Oh my God, there’s a limo.” He was initially embarrassed. He was like, “Oh my God, all the attention’s on me.” But once we got in the limo and all his friends were in there, they were having a good time. So he was super appreciative. He thanked us like 20 times that day, and lots of hugs and kisses from him. So it was all worth it.

Ashley Kehr:
That is such a cool, unique idea. And best part of it though, was Tony’s wife, Sarah, put on Instagram where DJ Tony had to stop the music because he had to take a real estate call that shows the kid just like sitting there, waiting for him and he’s just talking on the phone, and then she played the cricket noise in the background. It was perfect.

Tony Robinson:
Yeah, typical real estate investor. What’s going on with you, Ash?

Ashley Kehr:
Well, I’m looking forward to the weekend. It’s probably the last sunny really nice weekend here in Buffalo coming up. We’re going to go wake surfing, I think on Saturday and probably be the last boating day of the season.

Tony Robinson:
Then you guys go hibernate for the next like three months or something like that?

Ashley Kehr:
Yeah, yeah. Actually, next week, I’m going to Austin, Texas to the conference, FinCon. That should be fun. And hopefully, nice weather there.

Tony Robinson:
Yeah. Beautiful. What’s going on in your business world, Ash?

Ashley Kehr:
Do you want to say where you’re going?

Tony Robinson:
Well, I’ll be leaving to Maui in like three days now. So going to hang out with a Brandon Turner and my mastermind folks, so excited for that. So I’ll have some good updates once I get back from that on how my business and my life has changed.

Ashley Kehr:
Yeah. So excited for you. Well, today we have Sterling on the show. I think we could have just kept talking to him forever.

Tony Robinson:
Yeah. What a cool story Sterling has. We had Jason Peterson back on episode 129, and Jason and Sterling share some similarities in that they both spent some time in the prison system, they were incarcerated, but neither of them let that setback stop them from setting their sights on becoming a real estate investor and just totally crushing it. Sterling’s done like 10 deals, I think they’re at 10 doors in less than two years. Man, so much inspiring content coming out of today’s episode, for sure.

Ashley Kehr:
Yeah. Sterling actually mentioned that he started to get into trouble in his life at the age of 15. From 15 to 28, struggled. And then he’s 30 now and just completely 180 his whole life. He breaks down the deal on his primary residence. You guys will not believe the interest rate that he is paying. I will tell you, it’s more than 20% and less than 50%. So listen in as to why this is actually not a bad thing at all for him, the interest rate that he’s paying on this loan. He just gives tons of great little tips so nonchalant. Let’s get Sterling onto the show.
Sterling, welcome to the show. Thank you so much for joining us. Can you start off telling everybody a little bit about yourself and how you got started in real estate?

Sterling Shrout:
Yeah. I’m 30 years old. I’m from Dayton, Ohio. A super quick backstory to that, real estate just happened in the last year and nine months roughly. Prior to that, it was pretty dark, like 13 years of probation from 15 to 28, prison, parole, rehab, things like that. I never expected to get into real estate, I didn’t think that was something I could do. I didn’t think that was obtainable. And then running into a BiggerPockets Podcast from a Google search and starting to get educated, starting to realize that there may be an avenue for me to get in. That’s what got me here today.

Ashley Kehr:
Sterling, if you don’t mind, can we touch a little bit more on your background? Because I want to highlight how real estate really is an avenue that anybody can get into, that you don’t need a college degree, that you don’t need experience, you don’t need to have connections, that anybody can get started in real estate no matter what their background is.

Sterling Shrout:
Absolutely. When I very first got started, I had saved up $3,000. And so I went to the Google gods and I asked them, “How do I invest this to stop being poor?” I was raised poor and just owning my own home was a far-out dream, it seemed pretty unattainable at the position I was in. Ultimately, like I mentioned, I started to get educated, started consuming audio books, podcasts, any educational material I could get ahold of. And because of my record and because of my lifestyle prior to that, I had picked up skills along the way. I was a felon, so it was hard to find work. I would do a lot of Craigslist jobs, I started to learn drywall and framing doing helping people with rehabs, and I started to pick up my own tools.
At that point, around Christmas 2019, I had some of my own tools, I was just working as a handyman. And then when I started to transition to actually looking for properties, technically, I went through a trailer park phase first. That’s, honest, all the money I thought I had. So it wasn’t as cool as buying a whole trailer park or a mobile home park, it was specifically an episode I had heard about a guy getting a mobile home inside of a mobile home park, fixing it up, and then seller financing it.
To me, I felt like that was something I could accomplish. That got me excited. I think it took me three days to go through every mobile home park in the area to look for any of them that were beat up or empty or anything like that.

Ashley Kehr:
Did you drive around?

Sterling Shrout:
Oh yeah, absolutely.

Ashley Kehr:
Did you drive around to all of these? Yeah, you put in the hard work?

Sterling Shrout:
Oh yeah, like 10 hour hours a day. I still have the sheets and sheets. But that broke me into using the county site to look up properties, look up back taxes, even the last time it was sold, and things like that. So I don’t regret any of it, I don’t think that was a waste of time. But the conclusion I drew to that was, when I actually found a couple that I could obtain, then it became I had to go get permission from the park. My background kept me from getting in there in some cases. My criminal background is drug trafficking, people don’t really care for that.

Ashley Kehr:
So, were the mobile home park owners, the landlords, doing background checks and credit checks on the people that were buying the mobile homes?

Sterling Shrout:
Yeah. For me to even own it without even living there, I still would’ve had to pass that background check, and that was something I couldn’t do. So I related owning a mobile home to basically like being on probation, like the mobile home park would be my probation officer. So those feelings just instantly, I was over mobile homes and had to find another route. So being in Dayton, Ohio, there is a lot of affordable housing, there’s still tons of vacant properties in downtown Dayton, the east side, west side, the surrounding areas. So I started to shift towards that. Some of these houses sell for 5,000, 20,000, they need work. But that was where I saw my opportunity to add value to the situation.
I could do a lot of things as far as fixing it up, getting it livable. And that would cut costs to get me to an after-repair value and get me some equity.

Tony Robinson:
Sterling, I want to talk just a little bit, just set the table for the listeners about your current portfolio today. So how many properties do you have or how many deals have you done?

Sterling Shrout:
I’ve done four deals. Rental property wise, we have 10 doors, two four units and a duplex. And then I managed to buy my own home as well. So I have my own home without a mortgage.

Tony Robinson:
Wow. That is fantastic, man. And all this within the last less than two years, you said?

Sterling Shrout:
Yeah.

Tony Robinson:
That is fantastic. Congratulations to you, Sterling, because I think that’s a huge accomplishment for anyone, but even more so, given the, I think, complexities that came with your background. One question from me, Sterling, is, if you look back to your social circle from the time that you spent incarcerated and the folks that have also gotten out around the same time as you, maybe even before you, how many of them are doing what you’re doing today?

Sterling Shrout:
None that I can say for sure. The odds on these things aren’t very good. To quit using drugs and stay not using, the odds or not necessarily in my favor. To get out of prison and not go back, the recidivism rate is like four out of five within the first five years. So there’s not a lot of people that I had to look up to with my exact experience, there’s still not a lot of relatable people. There is a few, I don’t want anybody to feel like it’s impossible, but like you had brought up, the people I had to look up to, I had to go and create new relationships ultimately.

Tony Robinson:
And that’s the point that I wanted to really drill down on, was the creation of those new relationships. Before we get to how you built those new relationships, because I don’t think everyone’s situation will be as, maybe extreme is not the right word, but obviously everyone’s not going to coming from a background of being incarcerated. But I think a lot of people that are listening have a current social circle that’s either not supportive or doesn’t understand real estate investing and they let that social circle hold them back. So I guess the first question for you Sterling is, did you have any doubt in yourself about whether or not you could make this happen, given your background?
Did you have any self-doubt to say, “I’m not seeing anyone else who’s coming out of the prison system doing what I’m trying to do, so it must be impossible”? And if you did feel that doubt, how did you push past that?

Sterling Shrout:
I don’t want to say I immediately let it go. So having literally audio books and podcasts, those were my relationships for a really long time, those were my mentors, those were the people I looked up to. I’m pretty sure I hear Brandon Turner’s voice in my head when I think about real estate, it’s narrated by his voice. So those were the initial people that I listened to, drew strength from, things like that. Another part to that that I do want touch on is, at the end of last year, so the end of 2020, I had done a lot, I’ll just say that. I actually let myself breathe, I think that’s the best way to word it.
I think it was January 7th where I finally in the kitchen here broke down a little bit because I had been pushing so hard running from where I came from that I hadn’t let myself feel any achievement, because it didn’t feel real. From what I thought I deserved, to what we were able to create, there was a really big disconnect there. I never thought I’d even be a homeowner, honestly, and things like that. So there was this running from that poverty, running from that scarcity.

Ashley Kehr:
How important do you think it is for anybody to celebrate their wins, to take that time and to breathe and to think about it and to celebrate what they have accomplished before even moving on to the next thing they’re going to accomplish?

Sterling Shrout:
Personally, I think it’s really important. For me in my family, there’s little things we’ll do to celebrate. It’s not massive or anything like that, but we will go out to eat or we will splurge a little bit here or there. We’ve taken a vacation, things like that, to celebrate and reward ourselves. Because a lot of work goes into it. Sorry to go backwards here. But I used to struggle my family used to struggle it. We struggled without a reason, we just lived in struggle, and struggle sucks. Now, we struggle from time to time, but it’s for a purpose. And then when we reward ourselves for that after we’ve achieved it, especially if there’s big hurdles and hurdles we didn’t see coming, that’s a routine building or helps build those positive habits. That’s how I look at it.

Ashley Kehr:
That is such a good point. Is that there’s two different kinds of struggle, like your past, how you struggled, but how you may go through times of struggling now, but that’s because there’s that end reward and you know that there is something coming at the end, that you’re struggling for the benefit such as buying a new property or something like that where maybe you’re saving all your cash or a down payment and it is a struggle not going out to dinner or not being able to buy things or telling your kids no, because you’re saving for the future. There are those two different kinds of struggles.
And I think that’s so important that you bring that up because especially with social media, people get caught up in everybody winning, winning, winning. Well, there’s a lot of people that are struggling to get to those wins and you have to remember that for yourself or when you are struggling yourself that it’s for the end goal, that end destination. But you have to enjoy the journey too while you’re going. So even though the struggle may be hard, enjoy the journey as you’re getting there to that next deal, that next property, that next closing, the next flip or whatever it is. So I’m really glad you brought that up, Sterling.

Sterling Shrout:
Thank you.

Tony Robinson:
Before we move on, I just want to ask one thing about the social circle piece. You said that you didn’t have a lot of people in your social circle that were successfully investing in real estate. You started with the podcast, you started with the audio books, you started with just the educational component to feed yourself the right information. But what about in real life? Did you do anything in the real world to start building some relationships with other people that could be potential partners or mentors or guide you along the path?

Sterling Shrout:
Yeah, absolutely. Initially, I didn’t really recognize these people because I wasn’t looking for them. So if you’re not looking for it, you’re not going to find it. But I had two, my last two bosses, actually, the guys that I’d worked for. One was a commercial real estate attorney. It never clicked in my head that that might be an awesome guy to learn from. He was a good person and I looked up to him in that way for the way he was with his family and other things. And then the other guy, my most recent employer, he flew planes for the army, he had some rental properties, I would work on his rental properties. But still, at that point, it was something that I didn’t really think I would ever achieve. It was just, “This is what I do. I work on other people’s stuff.”
And then once those ideas started to take root in my mind, that’s when I kept those relationships going. I’d never burned those bridges or anything, but then I realized I need to be hanging out with these guys more, these guys are doing what I want to do, these guys have the skills I need, these guys are probably great people to work with. I’ve already worked for them, I know how we interact. So like those existing relationships that I had, they were the easiest to dive into. And then besides that, local Dayton real estate investors network and BiggerPockets.
This is my passions, so I could literally talk to anybody about real estate all day.

Ashley Kehr:
Sterling, do you remember that exact moment where you had that mindset shift? What changed you from being the employee working on other people’s stuff to being the person, “I want to own this stuff.”

Sterling Shrout:
Yeah. It literally was the first episode of BiggerPockets I listened to. I remember where I was and everything, it’s nuts. December 24th, Christmas Eve, I’m messing with Christmas decorations in the basement. I had it playing. And then listening to that episode and all the quotes get brought up and books get mentioned. And from there, it was reading Rich Dad Poor Dad, and then reading Cashflow and Richest Man in Babylon. And for the longest time, I thought I was broke. I thought I was broken, not broke, I’m still broke, but broken. Shoot, it wasn’t until this year that it dawned on me. I don’t think I was necessarily broken. My whole life, I was a crappy employee, always been a crappy employee.
That’s because I’m not an employee, that’s just never was who I am, and didn’t know there was another option. It’s like, “Oh, I’m just suck at being an employee. This is how life is.”

Ashley Kehr:
Tony and I actually just did a whole rookie reply episode on being an employee versus an entrepreneur and how it took… Tony always knew it, and he took being a W2 to fast track him to being an entrepreneur. For me, I just hated life being an employee and it took me a while to actually realize just like you, that I needed that shift, I was meant to be an entrepreneur and not to be a W2 employee. What would be your advice for somebody who maybe has just realized this now, that they are not made to be an employee and that they need to be an entrepreneur? What’s some of the first steps they can take to get to that entrepreneur, build that business, get out of their W2? What are some action items you could give our listeners to take?

Sterling Shrout:
For my experience, I wouldn’t probably recommend this, but for me, it was an easy jump because didn’t really have much going on at the job I had. I still had side jobs that I could do for income. So I just turned it off like, “Nope, no longer an employee. I’m going to make this work. And if I don’t, my life can’t get any more difficult than it already is.” That bottom is always there waiting. If I have to get this job, work 40 hours a week, I know I’ll be able to rent here and will survive.” So I was so close to that already. Basically, the risk was very low of it getting worse.
But the thing that I wanted to bring up would be, there is a time and place to be an employee. Even still today, I will gladly go, maybe not a full W2 job, but I will take work that doesn’t necessarily pay great just because I’m either building a relationship, I’m learning a skill, I’m working for somebody who’s an excellent entrepreneur and just being around them is going to rub off on me. So I think there is still a time and a place for that employee, not necessarily employee mindset, but for that employee position, when it can benefit you in so many other ways. And if you can integrate those things, that’s the key.

Tony Robinson:
That’s one of the lessons in Rich Dad, Poor Dad. It’s, the rich don’t work for money. And if you think about that story that Robert Kiyosaki about his dad, the rich dad made him and his best friend work in the shop for free so they could learn the lessons but not necessarily tie that work to actually getting paid, because if you build that habit of only going to work to get paid, then you’re going to be an employee for the rest of your life, but if you can use the work that you do as an avenue to gain knowledge, to gain skills, to build relationships, then that’s a way that you unlock the freedom that comes along with being an entrepreneur. Man, Sterling, what a valuable lesson. And it seems like it’s worked out well for you so far, right?

Sterling Shrout:
Yeah, absolutely. The most recent position I’ve got, my long term goals are commercial real estate, whether that’s multi-family or triple net lease actual businesses running out of the buildings. I got a contract with a business park locally, and I do some maintenance for them, some tear out, rebuild, change the structure for the new tenants coming in. But the guy I get to work with, part of the agreement is he teaches me how those triple net lease work, how these things get billed back to tenants, how the costs of snow removal, landscaping, all the different things get put back into the leases and how they’re divided and the way that square foot and common areas and all these things are worked back into the lease and billed back. So, if they want me to go up there and change a light bulb, I’m there.
I get to learn something and I get exposure to the people that run these places, that they work with, how to coordinate these things. And it technically pays probably the most I’ve ever made, so I’ll take it.

Ashley Kehr:
Sterling, that is awesome. And that’s how I learned, was I worked for an investor as a property manager, a leasing agent, I did some maintenance, I did everything. And I was paid and I got to learn how to run an apartment complex and build a property management company. So that’s awesome. You mentioned a triple net lease. Can you just explain to everybody what that is in case anybody doesn’t know?

Sterling Shrout:
Yeah, to the best of my ability, I’m still learning. The term triple net lease, there’s different levels to it. So there’s a basic, the tenant pays X amount per square foot. Depending on what the lease is worked out, if something breaks, the tenant pays to fix it. You can take that all the way up to a true triple net lease where a Walmart comes in, they take over, they pay property taxes, they pay to fix the driveway outside, snow removal, everything, you just rent to them, that’s it. They pay for everything. And that’s high level.

Ashley Kehr:
The only other thing I’d add to that is insurance too, that they cover the insurance too. The investor that I worked for, he did a couple triple net leases and it was all the repairs and maintenance inside of the building, the insurance, the property taxes. And then the owner was required to maintain the exterior of the property and the parking lot. So yeah, there’s many different levels, but basically you’re adjusting the rent and then having them include a bunch of expenses into their lease that they’re responsible for. So if you take two properties, one that has a triple net lease and one that doesn’t, the triple net lease, they’re probably paying a lower rent than the person that doesn’t have a triple net lease and doesn’t pay into the property taxes, doesn’t pay into the insurance.
Some advantage of that is that if you have the triple net lease, if property taxes are rising, insurance is rising, those increases are already built into the lease agreements so you don’t have to estimate, “Oh, okay. In two years, we’ll raise the rent to this,” thinking maybe property taxes go up this much or someThing like that. I don’t know if we’ve really talked about triple net leases that much on the podcast.

Tony Robinson:
Yeah, we haven’t really. We might need to get like a commercial expert on here to talk through that.

Ashley Kehr:
Sterling, we’re going to have to have you come back.

Sterling Shrout:
Give me a few more months, a few more months.

Ashley Kehr:
Before you came on, Tony, Sterling was talking a little bit. Was this the commercial deal you were talking about?

Sterling Shrout:
Yeah, this is place I had mentioned.

Ashley Kehr:
Yeah. Awesome. So yeah, maybe in a couple months, we’ll have Sterling back on to talk about this commercial deal. Sterling, one thing I’m curious about is, how are you financing the deals that you have done?

Sterling Shrout:
Yeah. So technically, I haven’t been able to afford any of the places that I have ownership in. So with the investment properties-

Ashley Kehr:
I think that’s a lot of us.

Sterling Shrout:
Yeah. And then just real quick as well, because I’ve been self-employed and then also haven’t made much money, there’s a really big hurdle, at least going in to get bank financing. So I’ve got a house with a bunch of equity trapped in and it sounds really cool to say I don’t have a mortgage, but I could be using that money so effectively. It happens.

Ashley Kehr:
How do you not have a mortgage? How did you purchase your house without a mortgage?

Sterling Shrout:
It’s just a private loan that I got, like 25% interest, but at a fixed rate, whatever, three year payback.

Ashley Kehr:
25% interest?

Sterling Shrout:
Yeah. Oh, my dad’s ruthless. Whatever. It was like a loan shark.

Ashley Kehr:
Okay. I want to dive into this loan shark, your dad. First of all, this got you into a property, right?

Sterling Shrout:
Yeah. I have no complaints.

Ashley Kehr:
N the numbers are still working out for you. For these payments, you’ve built some equity into the property, you’ve added value? Because I think people are going to get so hung up. Even my first reaction was, “25%? Oh my gosh.” But if the numbers still work and your end game of this property works with that 25% and it’s better than you renting somewhere and that’s how you got into this property, then who cares about the 25%.

Sterling Shrout:
Yeah. There was zero hesitation. We can just go into it real quick if that’s cool with you?

Tony Robinson:
Yeah.

Ashley Kehr:
Yeah, yeah.

Sterling Shrout:
The house that we moved into, the house that we bought, the purchase price was $20,000. There’s a little bit backstory to that, she was about to lose it to basically a tax foreclosure. I’d known of this house for a while and she didn’t want to sell it, she didn’t want to lose her stuff but she was about to lose her stuff. So the way that I solved that problem was agreeing to put her stuff in storage for a year until she could get to it. So that was the little problem I solved that got me in where nobody else could get in.

Ashley Kehr:
By listening.

Tony Robinson:
If we can pause on that just for a second because I don’t want to gloss over that important piece, Sterling, you found… Let me take a step back. In today’s market, everything’s selling like hot cakes. There’s so much competition in every market, but there are still sellers who are in distressed positions. And if you can go in and solve a problem for them, then you have an opportunity to get that property at a discount. To you, the idea of putting someone’s stuff in storage for a year is a very simple fix.
To you, it’s not that big of a deal, but to the other person, to the person who owned that property, it was a huge problem for them. A problem big enough that they were willing to give you a discount on the property if you helped them solve it. So if you have an opportunity, and I’m talking to the listeners now, if you have an opportunity to talk face to face with a seller about a property, the more information you can gather about their situation, about their potential obstacles, the better position you’re in to create a win-win situation.
I can’t remember who came up with this, I think I heard in an old marketing podcast, but whenever you’re talking directly to a seller, you want to be what’s called a PIG, P-I-G, you want to be a PIG. And pig stands for Professional Information Getter, Professional Information Getter. And the better you can be at that, the better job you can do of creating a win-win situation. And Sterling, it sounds like you got a heck of a deal by being able to do that.

Sterling Shrout:
Yeah, absolutely. And the total cost for storage for a year, 1,600 bucks, that’s fine. And it goes back into these costs that most times I would’ve been like, “I don’t want to pay this. I don’t want to pay 25% interest.” We’ll go through the numbers real quick. So I bought it for 25,000. At this point, I had saved up a couple bucks and started getting my credit together and started getting some credit limits. So I spent everything, I had maxed out all my credit cards to get this house fixed up. Once this house was under contract and we had made through a couple bumps that now I know we’re going to close, my lease on the house I was rent was expiring, so I let it expire.
I don’t want to get too far into this, but I made plenty of mistakes, I’m sure. But anyways, I put 30,000 into it, to date I’m about 30,000 into it. And that I get to save a lot, not time but money because I did a ton of work myself, some 20 hour days, some 22 hour days because at that time crunch because I let my lease expire and I have a family that needs a house. So that happens. The ARV when I bought the house and this COVID factor, COVID appreciation factors in a little bit to it and that’s my term for it, but that timeline of how things have gone up in value.
The initial ARV that I was anticipating was $115,000. So already right there, being 20,000 purchase price, 5,000 in interest and 30,000 into it, it’s 55,115 ARV, it’s a $60,000 gain. And I was able to do this in a little over two months. That’s like this crazy awesome win, factor in the appreciation, that current market value is 155,000 and that’s a ridiculous jump, but that puts it like almost to $100,000 in equity created. So then just looking forward, I still can’t get the mortgage or the bank loan at the moment to pull that money back out. There’s a worst case scenario, which isn’t that bad.
As June of this coming year, I’ll be able to sell the house and take that money, not as long or short term capital gains, but as my primary residence, I can pull that money out without having to pay those high tax rates and put that into another property or an investment property or however.

Ashley Kehr:
That would be two years, that June 2022 would be two years you were in that property to take the gain as tax free?

Sterling Shrout:
Yep. As my primary.

Ashley Kehr:
Yeah. That’s so awesome. Congratulations, $100,000 in equity built into this property.

Sterling Shrout:
It makes the interest rate not sound so bad.

Ashley Kehr:
Right, exactly. And that’s the whole point. I’m glad you dove into the numbers because if you still would be renting at your other place because you didn’t want to pay 25% interest, you wouldn’t have that and you’d be throwing your money away at rent every month where you built in $100,000 in equity that hopefully you can use in the future, or even if you sell it, you can take it and use it. That’s really awesome.

Sterling Shrout:
The payment’s only $50 more than my rent was.

Ashley Kehr:
What’s another deal? How have you financed your other deals?

Sterling Shrout:
Okay. All the other deals, I have an actual business partner. We have an operating agreement now and all those official things. So my business partner, he uses money from a self-directed Roth IRA. He got that set up by a company, he’s the manager of the company that manages his money. And then me and him work together. He can’t actually touch the properties in the sense of fixing it up, doing anything to it, that’s where I come in, but he can manage the money basically. So that’s how me and him work together.

Ashley Kehr:
Yeah. Let’s just break that down real quick. A self-directed IRA, it’s like a traditional IRA that you can take and you go to a company that sets it up for you, there’s a ton of them out there. I think on biggerpockets.com, they actually have some that are recommended on there, but you can go and you basically give them your IRA and the money in it, and they turn into a self-directed IRA. So instead of investing into the stock market, you can use it to purchase real estate. And like Sterling mentioned, if it’s your IRA, you can’t actually touch the property or do the renovations or anything like that. That’s why it works out that you guys are partners.
What does your operating agreement look like? What’s the structure you guys have put together?

Sterling Shrout:
The company that me and him have together is a multi-member LLC. One of the first things I did, probably did it wrong, but the first things I did getting educated and listening to whatever, all the audio books, real estate books was I went and made a sole proprietorship. So I went and made an LLC. It just was something to do more at that time than any real purpose. So my LLC, and then he manages his self-direct IRA through an LLC as well. So our two LLCs own a multi-member LLC. And then we had an attorney draft the 28-page operating agreement.
And that spells out both of our responsibilities, our limits on what we can do, who’s the managing member, who’s in charge of what. And that’s an official document that if God forbid something happens and me and him ever fall out, we have that operating agreement to go back on. Who owns what, who is responsible for what? And that was something we felt that was really important just to have done correctly.

Tony Robinson:
The operating agreement, I think, is an important document to have whenever you’re getting into business with someone else. I think the one thing that I’ll add on to that, Sterling, is that the operating agreement is also something that can change over time. We’ve got our operating agreement for our LLC, but then we’ve also got joint venture agreements for every product that we purchased with someone else. And that joint venture agreement has morphed and changed after almost every single deal. Every time we close on something, we realize, “Okay, oh shoot, we should have included that as well.”
Or, “Oh man, this didn’t really make sense last time so let’s make sure we do it this way the next time.” So for those of you that are listening, don’t feel like you necessarily have to get it right the very first time that you sit down to do it, you can always make amendments or changes to any agreement as long as both parties agree to it. One, and this is like a tactical, very detailed question, but one that I know comes up a lot, Sterling, how did you find that attorney? And what kind of attorney did you use? Did you go to a criminal defense attorney? Did you go to a real estate syndication attorney? Did you go to a family court service attorney? Who did you go to and how did you find that person?

Sterling Shrout:
The real estate agent that we bought our first investment property from, the attorney that settled the guy who had deceased, that was his property, the attorney that settled that is who we went to ask. It just so happened he used to, I’m going to get it wrong, but let’s just say he used to work for the city in real estate, maybe he worked in probate or something like that. He’s had law jobs in real estate for his whole career. And so while he does do other things, I don’t believe he does criminal or anything like that, but he just whipped up the 28 page agreement like it was nothing.
So we felt we had the right guy. And to your point, we have to update our stuff at the end of this year, ownership percentage has changed, some of me and his terms changed of how we do business now. And it’s just something, you just make an amendment to it.

Tony Robinson:
Keep it rolling. Awesome, man. Because I think some people get confused when they hear attorney, there’s so many different types of attorneys you can go to. If someone only does found court services like family law, if their focus is divorces and custody, maybe don’t go to them to help draft the operating agreement for your real estate business. You want someone with a little bit of specialty. That’s almost like going to a foot surgeon if you’re having heart issues, you want to go to the person that’s got the right focus there. Enough with the weird analogy.

Ashley Kehr:
Come on, David Greene, know these analogies.

Tony Robinson:
Enough with my weird analogies. Let’s talk about how you actually found this partner, Sterling, because I think Ashley and I talk a lot about the partner or about the power of partnerships, her and I both leverage partnerships in our own businesses. So I think the goal than goose for a new real estate investor is finding that partner that’s got a ton of capital, that’s willing to give it to you as this rookie investor. So Sterling, how the heck did you get so fortunate to find a partner like this?

Sterling Shrout:
I want to say sheer luck, but there’s a little bit of intention to it. I had found a deal, I had a former boss that I wanted to work with. We talked about it, we planned on working together. Because of his job, he got called out of the country. His wife didn’t want to handle it. And I totally agree, that’s a lot of stuff to take on, especially when if it’s not your wheelhouse. So one of the things that you hear on BiggerPockets quite frequently is let people know what you’re doing. If people don’t know what you’re doing, they can’t do anything good or bad to help you.
So this guy, the house I was renting, this guy had purchased the house next door. Years prior, he had been slowly fixing it up for his kids to live there while they went to college. And me and him had always just talked in passing and never about much. Well, after the guy that I intended on doing my first property with, after he got called away, I had already mentioned that property to my neighbor or to the guy that owned the house next to me that was fixing it up, my potential future partner gets called away, well, I told that to the guy, like, “Hey, Matt has to go out of the country, now I need to find somebody that can do this with me. This is what we were going to do. I was going to fix it up, he was going to pay for it. We’d split, whatever the equity gain was.”
He just came out of nowhere like, “Well, let me ask my wife if she’s game,” and I was shocked, just stone cold shocked. I’m like, “Oh, okay, cool.” Of course, it takes like a week to hear back from finally, we don’t even have each other’s phone numbers. And see him a week later and he was all over the fence, like, “Yeah, she said she’s down. Let’s do this.” We didn’t even know how much the place costed yet. We didn’t have a final price on it, anything. So from there, that is just… I was super lucky in that sense, and then super lucky that it turns out he’s a super fair, easy to deal with, professional partner. But that luck was created by intentionally letting people know what I was doing.

Tony Robinson:
That last sentence Sterling is exactly what I was about to point out is that luck was intentionally created by the actions that you took. Had you not, A, already been hustling to try and find the deal. That was the very first step, you had to hustle hard enough to find this good deal. B, you had to be confident enough, and I guess just like social, enough to talk to this random guy who owned this house next to you that you only saw every once in a while about the goings on in your real estate business. And then B, you had to have the courage, not even necessarily to tell him, “Hey, do you want a partner?” But at least to express the situation that you found yourself in.
And it was all those things coming together that allowed you to find this partner. And I think what a lot of rookies don’t believe yet is that there are so many people in your circle currently that have the desire to invest in real estate, but have never told you about it. I guarantee that for everybody that’s listening, there’s probably five people in their life that have always wanted to invest in real estate but have never verbally said it out loud. So if Sterling is the one that’s on Instagram, on Facebook, on LinkedIn, at the cookouts, at the wherever, at the grocery store, talking about real estate all the time, eventually you’re going to bump into one of those people that have had that thought in the back of their mind that they want to get started in real estate investing, but they don’t have the time, the desire, the knowledge, whatever, but they have the money.
And then you can be the perfect partnership. So man, Sterling, I absolutely love, love, love that example, man.

Sterling Shrout:
Me too.

Tony Robinson:
All right. I guess one last question on the partnership side, Sterling, what advice do you have for someone that’s looking to get into real estate investing, leveraging the power of partnerships? Is there anything that you feel that you would’ve done differently going into this or lessons that you’ve learned so far now that you guys have done a few deals together?

Sterling Shrout:
For us, it worked out great, like I mentioned, I did my best to do this with the best of my ability, be transparent with the money, make sure I didn’t screw anything up, make sure that I did everything right. For me personally, it was because I have a criminal background. If I go and screw up a business relationship, I won’t have much in my corner after that. But we did the first three, four months working together basically on a handshake, there was no operating agreement yet. We just had a few talking points. I think he might have Googled a promissory note at some point because he was sending me the money to buy the materials, to fix things up.
I think the best advice besides any emotional intelligence or relationship factors would be finding that deal. The partnership would’ve never happened if I didn’t find something that was worth pursuing for me and for him, and everything else I’ve found deal wise, there seems to be somebody ready to go if it’s a good enough deal.

Ashley Kehr:
Sterling, I want to take us to our rookie deal review. And I was wondering if you could tell us about your self-storage facility.

Sterling Shrout:
I don’t technically have ownership of that. I was still an employee at this time, but I’d be happy to.

Ashley Kehr:
Yeah. Let’s talk about it though. Yeah, yeah. Let’s break that down because that experience is still, I think has probably given you a leg up that you feel confident and you could do this on your own.

Sterling Shrout:
That definitely down the road made me realize that.

Ashley Kehr:
Yeah. And even you don’t have to break down the numbers or anything like that, but if you just want to tell us how it was approached and how you did it, because you knocked down a building.

Sterling Shrout:
Just everything on the inside and some offices.

Ashley Kehr:
Go ahead. Tell us that story.

Tony Robinson:
He’s so nonchalant. We were just not getting everything on the inside, a couple offices.

Sterling Shrout:
Yeah. That was the last guy I’d worked for and the guy I just mentioned partnering with. So he had bought an old CNC shop or plumbing shop or something, and his intention was to turn it into self-storage. I had been working for him for maybe nine months, almost a year. I was the only guy that worked for him. So I think he knew I was going to do it, I just didn’t know he was going to have me do it yet. So he brought me in, “This is the building I bought, this is the warehouse I bought, whatever. I want to turn this into self-storage.” And the way my mind works is like, if you give me a problem, my brain has to come up with at least plausible solution or potentials or ideas, whatever. And I think he knew that too.
So he just let me loosen there, he’s like, “We need to turn this into,” he started doing market research, what’s available locally, is it five by fives, five by 10s, 10 by 20s? What’s the market? And actually letting me do those things with how many cars are driving down the street? What’s all these little data points that come in with self-storage, and he had done a ton of research into it. But I actually got to design the place. So I actually got to come up with how we’re building the units, how many units there’s going to be, the width of the aisles, the lighting, every aspect of it.
We had to have an architect come out and we create plans and official things, present to the city. I just want to brag real quick, the architect was three feet off, my measurements were exact. I don’t get to say that often. So it took me, I think, about three months from start to finish, and I literally did 95% of it by myself. I was there 14, 16 hours a day. He baited me into it, if I got it done by Christmas or the end of the year, I think I got a bonus. So I got it knocked out really quick, but building somebody else… I didn’t buy the place, I didn’t bring that to the table, but designing it, coming up with everything, except for pricing basically, I created that place.
And that felt good and bad, I guess, knowing you can do that, but not having the resources to do it. And that is one of those early things that started to maybe get my mind pointed in the right direction and get me to understand that I actually do have some skills that bring value. So I don’t know what other details you’d like, I’ll tell you whatever.

Ashley Kehr:
Well, also think about how if you did this on your own first, you wouldn’t have had his guidance. You mentioned he showed you how to look at the data points and different things you should be considering like traffic through there and what size units to build, things like that. So I’ve had a similar experience where I got to do new development working for another investor and I learned so much. And if I would’ve went and done that on my own, by myself, I would’ve made so many mistakes. And we made mistakes even me and the investor on the new builds that we did, I can’t imagine if I did it on my own, but I think as you go on each development, you learn more and more and you get more lessons out of it.
And even though you or I don’t have ownership over those buildings we were paid to do it, we learned a lot of lessons, took a lot of value from it. So I think that’s really awesome. And I don’t want people to get hung up on opportunities that are out there where yes, you may not have ownership of it, but it is a great, great opportunity still to learn so that when you do have ownership of something, you can be the best that you can be because you have that experience. So that’s awesome.

Sterling Shrout:
And back to working for relationships and skills, he just bought another property to do the same thing. And this time it should turn into ownership, so it created that opportunity in the future that I didn’t know about yet too.

Ashley Kehr:
That’s another great point there too. My guy is now my private money lender.

Sterling Shrout:
Yeah. That’s awesome.

Ashley Kehr:
The network and just everything that you can get out of working for somebody and getting that experience, for rookie investors, it’s something I can’t preach enough that if you really do want to get out of your W2 right away, then find a job where you’re going to get that experience, that mentorship and get paid to do it and to learn. I’m going to take us to our Rookie Request Line now. Anybody can call in at 1-8885-ROOKIE, and leave a voicemail for Tony and I. We may play it on our show for a guest to answer. Sterling, are you ready for today’s question?

Sterling Shrout:
Absolutely.

Andy:
Hi, my name’s Andy [inaudible 00:45:26]. I currently live in Northern New York with the Army and I’m going to be getting out this summer, I’m moving back to Ohio. I’m looking for a value-add duplex when I move in, and I’m thinking to continue to BRRRR the duplexes as I go. My question is, what’s the difference between refinance on an existing loan and a HELOC and when would I use those? Thank you so much.

Sterling Shrout:
Okay. Well, the first major problem, I’m here in Ohio already is, you don’t want to come back. I’m kidding. The fishing’s way better.

Ashley Kehr:
Well, I’m in New York, so I’m not sure you should stay.

Sterling Shrout:
Okay. I love the idea, value add is my specialty. The advice I would give to him, he mentioned the Army, I don’t know that should be brought up more or looked into farther because being a part of the military drastically changes a lot of advantages that you get when getting loans. If you’ve ever applied for something they ask, are you a member of the military? I’ve never got to click that box, but from what I understand, it’s a good one to be able to check.

Ashley Kehr:
Yeah. You can get a VA loan where it’s 0% down. So let’s say in this scenario, Andy gets a VA loan to purchase the property, and then he’s added a bunch of value, should he refinance out of that VA to pull out the extra equity? Or should he get a line of credit on the property? What would be your recommendation, Sterling?

Sterling Shrout:
I would really look into the refinancing personally, because another thing, like I said, this isn’t my wheelhouse, my specialty, but from my understanding, the VA loans also allow you to refinance every time there’s an opportunity to make the loan better. So whether there’s money to be pulled out for a rate to be lower, you can refinance, I think multiple times in a year even. His turnaround maybe way quicker on the refinance versus a home equity line of credit and more substantially advantage, especially if he goes that route of using the VA loans.

Tony Robinson:
Yeah. I think you do hear this question a lot like HELOC versus refinance. I feel like it depends on the situation. Say that your current interest rate, maybe you locked in like at the very, very bottom and you’ve got like a sub 3% interest rate. Say he’s at like 2.5% on a 30-year fixed. If I’ve got that on a property, I don’t know if I would want to refinance today because there’s a chance that it could be higher than what I’m paying. So you have to weigh the difference of, is the cash that I’m getting out worth the increased interest rate that I’m paying.
I think the benefit oftentimes, and actually you can probably speak to this more intelligently than I can, but from what I’ve seen, we’re trying to get a line of credit, not a home line of credit because it’s not an investment property, but the loan to value ratio on the lines of credits tend to be a little bit lower than what you can do on a cash out refinance. So you can tap into more of the equity if you’re doing a cash out refinance versus doing a traditional home equity line of credit. Have you seen something similar on your side, Ash?

Ashley Kehr:
Yeah. If I were to go and refinance my house right now, I could pull out 80% of the equity in it. But if I were to go and get a line of credit, keep my existing mortgage and go and get a line of credit, I could potentially go up to 95% or 85%. They’ll go up higher when you have that mortgage and then the line of credit instead of just doing a mortgage for the whole refinance for the loan to value.

Tony Robinson:
Yeah. So shop around, Andy, hopefully you’ll find which one makes the most sense for your situation. So awesome answer, Sterling. I want to take us into our Rookie Rockstar. So if you want to get shouted out as a Rookie Rockstar on the Real Estate Rookie Podcast, be sure to join the Real Estate Rookie Facebook group. We’re 30,000 plus people strong, or get active in the BiggerPockets Real Estate forums, we’re pulling people from there as well. My life literally changed by being active in the BiggerPockets forums. So if you guys aren’t in there, you’re missing out big time.
Today’s Rookie Rockstar is Lane O’Neil, and Lane’s dad got their first property flipped. It took them a little longer than they expected, but they did 95% of the work themselves. They learned a lot along the way, but they realized the hardest step was the very first step. So they bought this property for $100,000, spent another $32,000 on the rehab, and then they were able to sell that property for $197,500. So pretty good spread on the very first flip. So Lane, congrats to you.

Ashley Kehr:
That is awesome, Lane, nice work. Sterling, thank you so much for joining us today. Can you tell everybody where they can reach out to you and find some more information about you?

Sterling Shrout:
Yeah. Feel free to reach out to me on BiggerPockets. I try to be as helpful on there as possible. And then I’m not great at social media, but I have my own website, just sterlingshrout.com. And same thing, I try to help out wherever I can.

Ashley Kehr:
Awesome. Thank you. This has been a great episode. Thank you for sharing all of your knowledge and giving our listeners great value and to Tony and I too. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson on Instagram. Thank you guys so much for joining us, make sure you join us on Facebook and check out the BiggerPockets.com forums, or you can search Real Estate Rookie on Facebook and join that group too. Thank you guys. And we will see you on Saturday for a Rookie Reply.