Welcome back to The Darin Batchelder Real Estate Investing Show, where today we're joining our guest Jennings Smith in mastering the game of real estate investing. This episode is a journey into the heart of property investments, featuring firsthand experiences, priceless insights, and top insider tips.
From structuring creative financing solutions to navigating multifamily, single family, and commercial properties, Jennings offers a roadmap to mastering the real estate game. Discover the importance of understanding your investments, embracing calculated risks, and executing strategies for maximum portfolio growth.
- 00:02:07 Started with mobile homes due to affordability. Met landlord with abandoned trailers. Bought, fixed, and sold or rented. Low cost, easy way to start.
- 00:03:15 Mobile home park project: bought, fixed, sold, setbacks, perseverance, expansion
- 00:07:40 Real estate success without money: courage, action.
- 00:13:29 Invest in what you understand and research.
- 00:19:28 Passed on tight deals, closed profitable one.
- 00:22:35 Maximize cash flow with fixed-term debt.
- 00:26:53 Limit equity sharing, utilize hard money loans.
- 00:33:33 Purchase structured with bank and seller loans.
- 00:35:17 Profitable investment property acquired with value-add strategy.
Episode Table of Contents
- Mastering the Game and Investing in What You Understand
- Mastering the Game: Starting Small and Building a Portfolio
- Darin's Experience With His Real Estate Program
- Navigating Market Conditions, Mastering the Game, and Future Plans
Mastering the Game and Investing in What You Understand
Darin and Jennings emphasize the importance of investing in assets and industries that you have knowledge of and experience with. They use real estate investing as an example, noting that real estate can be less complex and more understandable than other investment vehicles like the stock market.
Darin advises being cautious about investing in complicated deals or industries that you lack understanding of. He argues it is smarter to invest in areas where you have existing know-how.
Jennings echoes this sentiment, warning against investing in opaque assets or markets. He highlights real estate as a more transparent option that an average person can grasp and research effectively.
They posit real estate has benefits like potential cash flow from rentals. Additionally, real estate presents opportunities to create value by renovating, renting, or selling for profit.
Overall, their core message is to stick to investment options you genuinely comprehend based on your own expertise and background knowledge. Areas like real estate can be more accessible versus sophisticated industries like the stock market.
The Benefits of Mastering the Game of Real Estate Investing
Darin and Jennings discuss several advantages of real estate as an investment choice.
One benefit is cash flow. By renting out properties, real estate can provide regular income in the form of rental payments. This gives investors ongoing revenue separate from the value appreciation of the property itself.
Another benefit is the ability to actively add value. With real estate, investors can create profit opportunities by renovating, renting out, or selling for a higher price per their own skills and efforts.
Real estate also offers more transparency and understandability compared to stocks or other complex assets according to Darin and Jennings. The fundamentals of supply, demand, location, etc. are generally more graspable.
Additionally, Jennings notes real estate gives average investors accessible options, from REITS to physical properties. The barrier to entry can be lower than industries like private equity or hedge funds.
In summary, they posit real estate as an investment avenue that is cash-flowing, active, transparent, and accessible for many individuals. These traits make it attractive relative to sophisticated industries like the public stock market.
Viral topic: The Importance of Experience in Real Estate InvestingQuote: "And when I unlocked that and realized who are the people that have closed deals that have been in the longest that have had the most success with this. And by and large, they were people that already had a portfolio. They've got a couple single family homes or they had owned their own business and they just took this and ran with it. Because it is a building block, but you still have to have that spark, that entrepreneurial, like, I'm going to make this happen and take the risk no matter what."— Jennings Smith
Mastering the Game and Exploring Different Real Estate Options
Darin and Jennings discuss the various options available in real estate investing, including multifamily properties, single-family homes, short term rentals, self storage, and different commercial and industrial properties. They mention that investors should feel comfortable with the type of property they choose to invest in. Darin and Jennings stress the importance of taking calculated risks when investing in real estate. Even experienced investors find their first deals scary, but investing in real estate can provide the courage to take the next step.
Importance of Mastering the Game, Feeling Comfortable, and Taking Calculated Risks
The hosts emphasize that real estate investors should feel comfortable with the type of property they invest in. While all investments carry some degree of risk, Darin and Jennings note that investors should aim to take calculated risks. Even experienced real estate investors find their first few deals daunting, but starting with a property type you feel comfortable with can provide the experience needed to expand into other areas. Taking those initially calculated risks is important for gaining the courage to take the next steps in real estate investing.
The Importance of Understanding the Fundamentals: "If I can't understand the deal pretty simply, then I don't want to place my money in that."— Jennings Smith
Mastering the Game: Starting Small and Building a Portfolio
Darin and Jennings talk about the importance of starting small in real estate investment. Darin believes that even renting out a room in one's own house can be a good starting point for real estate investing. He says this allows investors to learn the ropes of being a landlord and gain confidence in their abilities. Jennings agrees, noting that managing a single rental room is a low-risk way to gain experience before expanding to larger investments. He advises testing yourself on a small scale first.
They share that even renting out a room in one's own house can be a starting point, allowing investors to learn the ropes and gain confidence. Expanding on the benefits of starting small, Darin highlights how managing a rental room in your existing home lets you learn critical skills like screening tenants, collecting rent, and handling maintenance issues. He says these lessons build confidence and set you up for success as you scale up. Jennings echoes this point, stating that rookie mistakes are less costly when you start small. Getting comfortable with the fundamentals of landlording prepares you to take on larger real estate investments down the road.
The Potential for Property Appreciation
Darin highlights the need for a positive cash flow and the potential for property appreciation when building a real estate portfolio. When discussing building a real estate portfolio, Darin emphasizes the importance of positive cash flow. He only buys rental properties that will generate more rental income than expenses each month. This consistent cash flow then funds the next purchase. Darin also factors in appreciation – choosing properties likely to increase in value over several years of ownership. The combination of cash flow and appreciation lets a portfolio grow exponentially.
He discusses a deal he closed for a property with 32 units, sharing the strategies he used to increase the rent roll and add value to the property. Darin provides an example of a 32-unit apartment complex he purchased last year. To improve the financials, he renovated several units to justify higher rents. He also installed coin-operated laundry machines to create a new income stream. Within 12 months, Darin increased the property's net operating income by 18% through these strategies. He then refinanced to pull cash out for the next acquisition.
Rental Market Stability: "Now you say, well, rents rents may go down, but if you look at the historical charts on multifamily rents over the last, like, 70 years, they don't go down."— Jennings Smith
Darin's Experience With His Real Estate Program
Darin started a real estate program that accepted anyone who paid a monthly fee. He later realized that many participants were not succeeding in real estate investing. Darin discovered the most successful people already had real estate experience or owned businesses.
This showed Darin the importance of having a solid foundation of knowledge and experience before becoming a real estate investor. Participants without this background struggled more. Darin learned to be more selective in who he accepted into his program. He looked for participants who already had the entrepreneurial mindset needed to thrive in real estate investing.
The Significance of Experience, Mastering the Game, and Mindset
Darin stresses the significance of having experience and the right mindset before diving into real estate investing. He believes this prior knowledge provides the necessary foundation for success.
Darin found the most successful real estate investors either had previous real estate experience or were business owners. This gave them the skills and entrepreneurial spirit to take on real estate projects and turn them into profits.
According to Darin, real estate investing requires more than just taking a course. You need real-world experience and the right mindset to take action and deal with the challenges that arise. This allows you to manage the risks and reap the rewards of real estate investments over the long term.
The Impact of Rising Rates on Property Value: "If rates continue to rise, the value of my property may even drop. But I'm insulated from that because I'm cash flowing. I can wait it out."— Jennings Smith
Challenges in Acquiring Down Payments
Darin and Jennings discuss the challenges real estate investors face in acquiring enough capital for down payments, which are typically 20-25% of the purchase price. As Darin shares, it took him around five years to accumulate his real estate portfolio, highlighting the need for persistence and perseverance in saving up capital. For new investors starting out, it can be very difficult to come up with enough cash on hand for down payments, especially if looking to purchase multiple properties.
Underwriting Tool: "Get an underwriting tool and understand how the underwriting works so that when you're looking at these pitch decks from other syndicators, you can see for yourself, is this something I agree with?"— Jennings Smith
Alternative Financing Options
Given the difficulties in amassing down payments, Darin and Jennings explore alternative financing options beyond traditional mortgages. One route is seller financing, where the seller carries back part of the mortgage and collects payments over time. This reduces the down payment needed. Another option is utilizing private money lenders, who provide short-term loans at higher interest rates. Finally, Darin advises forming partnerships with others to combine resources for down payments. Getting creative with financing can help investors enter deals without large amounts of capital upfront.
Navigating Market Conditions, Mastering the Game, and Future Plans
Darin expresses concerns about the potential impact of rising interest rates on the value of his properties, but he feels insulated due to positive cash flow. Darin mentions he has some concerns about how rising interest rates could negatively impact the valuation of his real estate portfolio. However, he feels his properties are well insulated from decreases in valuation thanks to the strong positive cash flow the units generate each month. As long as his properties continue to generate consistent monthly cash flow, he is less concerned about fluctuations in property value.
He mentions the possibility of refinancing in the future but acknowledges the uncertainty surrounding interest rates. Darin notes that he may consider refinancing his properties in the future to pull out equity or take advantage of better loan terms. However, he acknowledges there is a lot of uncertainty around where interest rates are headed in the near future. He seems unsure about whether refinancing in the current environment would be advantageous given the risk that rates continue to rise.
Darin emphasizes the importance of understanding the inherent illiquidity of multifamily properties and advises investors to focus on positive cash flow and potential value appreciation. Darin stresses that real estate investors need to understand that multifamily properties are inherently illiquid assets. They can be difficult and time-consuming to sell. He advises real estate investors to focus their efforts on generating consistent positive monthly cash flow from their properties. Cash flow is king in real estate investing. While potential appreciation in property value is great, investors should prioritize cash flow and not rely solely on property value appreciation over time.