Megan Sarles is in the house for this week's episode of Real Estate Investing Unscripted! ⭐
Megan is the Manager of Construction Risk here at Fund That Flip and invests in multi-family real estate on the side. Her role within the company involves intensive analysis of the deals we underwrite, so we had her sit down to give us the secrets and break down the art of house hacking, why she likes the BRRR strategy, and why Cleveland is a great market for rentals.️
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Brendan: Welcome back to another episode of Real Estate Investing Unscripted. My name is Brendan Bennett, your co-host, and with me is your other co-host, David Duggan. David, what's going on?
David: Not a lot. Happy to be here. In the office studio. Excited about today's podcast, one of my favorite people on today. Last episode, who did we have last? We had Dawson — Dawson was a great one. Fascinating young guy doing a lot of really cool stuff. So excited for that one to air, but yes, today we have…
[Note from the Production Team: Yep, once again, we didn’t air these in the order we recorded them! The last episode we aired was with Doug Dvorak, giving you a very deep-dive into how capital works on the lending and investing sides of the business. Make sure to listen to both episodes: Doug Dvorak and the two-parter with Dawson Gant!]
And, she's awesome. I'm really excited to chat with her and get her perspective on a ton of different things.
Brendan: Yeah. How about, how about the order of operations with that? We have a borrower on one side, and then we have the very next episode, the underwriter, the one who's seeing how much profit Dawson's making approving his deals. So what a good flow we got going.
David: Yeah, so I'll give Megan her introduction here. So, at Fund That Flip Megan runs the Construction Risk Team as part of the Asset Management branch of our company. So we'll talk about what that means and what exactly she does. She has a hand in the construction loans through the life of a project, she provides transparency for our stakeholders. Outside of FTF, she invests in some of her own projects in residential real estate here in the Cleveland area. She specifically utilizes the BRRRR strategy, so I know we've talked a lot about that on the show in previous episodes, so she'll talk more about that. And she currently holds seven units! And she's continuing to scale.
And, I'll speak off the cuff here. I know she's doing a little leveraging of her own position here and the knowledge she gains here into her own personal investing. So really cool and and unique position she's in and excited to talk to her about it.
Welcome to the show.
Megan: Thanks, guys. Happy to be here.
Brendan: Thanks for joining. Megan, if you wouldn't mind, can you just give like a quick summary background, 60-second elevator pitch, whatever you wanna call it for the listeners.
Megan: Yeah, definitely. So I started becoming interested in real estate a couple years ago. What really got me interested was I love being able to fix things and do projects and the architecture of real estate. Just taking something like a distressed home and turning it into something beautiful. So I started off in tech sales and I absolutely hated it, and me and one of my partners now today would sit at our job every day and talk about real estate instead. We’d be browsing Zillow, trying to figure out how do we get into real estate?
So as I started to do more research listening to BiggerPockets, like all good real estate investors, one of the things that they had said was to be a good underwriter. So I wanted my personal goals and my professional goals to align there.
So I started looking for jobs.
I could be an underwriter as looking at property values and getting that full experience. So I started perusing on LinkedIn and found some common connections with Fund That Flip — one being Maria on the underwriting team. So I reached out, got a little bit more information, and it seemed like a great fit.
So I applied and joined Fund That Flip in 2021, and around the same time I purchased my first property, which was a duplex in the Tremont area of Cleveland, which I did a house hack in. So being at Fund That Flip has provided me so many resources and so much knowledge where I've been able to buy a couple more properties since I've been here, which has been really exciting and I've absolutely loved that my professional and personal goals have been able to combine like that in a way.
Brendan: Yeah. This this is awesome, Duggan, and I feel like we've talked about this a couple times on the podcast about how the core of employees at Fund That Flip, a lot of them were either interested in real estate before joining or like shortly after joining, They start to see an acceleration in that interest and start to do more and more. I know my situation's pretty similar, Megan, when I started at Fund That Flip, I had two or three units. I joined as an underwriter, learned more and more about the business. I was around our borrowers who just have a wide variety of skill sets and different strategies that they deploy, and then slowly started to use that as motivation to build up the portfolio over time.
I think one thing that would be interesting, just as a starting. Underwriting's often this just scary black box that most people don't really understand. So anyone that's ever went and got a conventional home mortgage, when something goes to underwriting, you're just “fingers crossed,” hoping that thing gets spit out the other side and you're in good shape and you're on the path to closing.
I think in the hard money space, it's a little bit different. I'd be curious just to get your take. What is an underwriter? What do you do, and what's the most important piece about your job?
Megan: Yeah, good question. So an underwriter is basically that first level or that first stop of the loan to make sure that we're mitigating all of the risk of the project. So when a deal comes in, we're first looking at every single piece of that deal. Not just the asset itself, but we're looking at the borrower as well.
We wanna understand the full story of what's going on. So a lot of the time, when a deal comes across my desk, I wanna familiarize myself with the market first, understand where is this asset? What asset is it? Are we talking about single-family, multi-family? And then we start to get into some of the more nitty-gritty details of what are properties that are of the same asset class selling for in that market? So we start looking at comparable sales and trying to decide what is our property going to be worth after its rehab. So now we start talking ARV [after-repair value]. We're looking at the scope-of-work, making sure that everything makes sense, that the scope is feasible to what the borrower wants to do. So those are the couple things that we start doing on the asset side. From the borrower perspective, we wanna see, is this going to be a good borrower for us? So we start looking at things like credit score. We mentioned asset statements. We wanna make sure that they're liquid enough to be doing this deal. We look at background, making sure that nothing on there is a risk to us. Along that, the biggest driver for us is experience: What have you done before? And can we feel comfortable that you're doing this project because you've proven that before to us.
Brendan: I'll sneak one more question here, David, and then I'll let you jump in here. The experience piece is super interesting. And if I'm a listener and I'm like, “well, hey, I've got experience. I've GC’d a few bathroom remodels, I've done a few wholesale deals.”
Dive into the experience side a little bit, Megan. ‘Cause I think to your point, that is the way that we de-risk the loan, to the greatest of our borrower's ability to execute the value-add that they're anticipating to do in that project. So what are some tell-tale signs of, “hey, the experience is gonna verify and, and we have a high degree of confidence” — and maybe some other experience types that are, a little bit different from that first example?
Megan: Yeah, that's a great question. And one size does not fit all here. There's a number of different quote-unquote, “experiences” that you could have for us to get comfortable with a project. First and foremost, the best one is a settlement statement that has your name on it or your business name on it that ties to you.
We can see when you bought it, we can see when you sold it and if in between that time we see a significant increase in the price, there's a pretty good chance that you did some value-add work to it. On top of that we also look at JV agreements. Maybe you're not the one on the HUD, but maybe you were somewhat part of that agreement or part of that project.
So that's another good one. GC agreements, maybe again — you're not the one who's gonna be on the HUD, but you're the one who's actually doing the work. You're the experienced partner in this case. So keeping track of the contracts that you make with other people, especially if you are that GC, make sure you document it out. Get someone to sign and date it. So then when you do wanna go get a loan and someone's asking for your experience, you could produce all these contracts and say, “Hey, yeah, look how experienced I am. I've got all these contracts.”
We can start getting into some other types if you've got photo proof of you doing a project, before and after pictures, that starts to get a little bit harrier. Real estate agent experience. I count that when I'm looking at a loan, like we said, we wanna understand the bigger picture of our borrower and the deals. Maybe you were a wholesaler real estate agent. There's a whole bunch of different things and roles you could be in the real estate world that add value to your borrower profile. So it's not always just that HUD, those are the strongest, but again, there's a million different things that we could look at.
David: Yeah. To me, the the experience piece was always like the giant Band Aid that could fix a lot of other bad things for borrowers. If your credit score is a little light, if the deal wasn't perfect. But if you have that experience, it shows you have the ability to execute.I think that fixes a lot of things.
Megan, I would have — almost all of our borrowers at some point would ask me about the underwriting process. Like, what does it look like? How do I qualify? My answer to them was that it's much more of an art than it is at science. You may disagree with that or you may agree. I don't know. But I would tell people “Hey, there's no two files that look the same.” And honestly, very rarely do we ever see what I would consider as a perfect file. We always look at what are some compensating factors that we look for. Like, what are some holes that we can plug in the deal that make this file look more perfect.
Can you touch on that just as, what does a perfect file look like for you? How often are you actually seeing a truly perfect file that just skates right through underwriting without any additional questions? And then, what are some — talk about compensating factors if you could.
Megan: Yeah, absolutely, and I think you hit on a really good point there, that underwriting at Fund That Flip is more of an art than a science, and I think that's one of our huge value drivers opposed to some of our competitors that are just putting your deal through a computer, spitting out either a yes or no.
We're really taking the time to look at some of those little compensating factors and understanding the bigger picture of what can we do here and what can we understand to help this investor get this deal done. So perfect files come along. I would say maybe one in 10.
And if we're talking perfect file… I'm thinking 750+ credit score, squeaky clean, clean background. You've got 10+ projects under your belt. You're doing maybe fix-and-flip in a really desirable market and your ARV is way higher ‘cause you bought the property low. That is a perfect file to me. \
We know current market today, not everyone's buying way under market and your ARVs aren't going to the ceiling anymore. Kind of just a factor of the depreciation of some house prices in the area. But like I said, maybe one in 10 is a perfect file. We do have some really awesome repeat borrowers that have used us time and time again. I would call those perfect files. Maybe they weren’t extremely perfect on the front end, but they have done enough business with us where we can take one look at a deal of theirs and know exactly what's going on.
We know everything about them already. We know how much money they usually have coming in and out of their bank statements. So compensating factor: You wanna talk, maybe you come to us with a deal. Maybe it's mid-month or closer to the end of the month. Your bank accounts are running a little bit, little low, but you've got a hefty rent roll that's coming in come the first. And we know that, and you're able to produce those rents to us where we know that historically, we've seen those come into your bank account every month. I can get a lot more comfortable knowing that you have money coming in.
While on the topic of bank statements, maybe a W2 job, maybe you're a a side flipper and you have a great W2 or maybe one of your partners, your wife, your husband, whatever, has a great W2 job. We know that there's constant flow of money. Liquidity could be everything in a project. We talk about experience, but if you've got a million dollars and no experience, we could probably find something to make it work. You can go find an experienced partner if you’ve got the money for it.
So just a couple little things there. Compensating on the experience, we touched on these already, but it's not always just the HUDs. It's like what else do you do in the real estate world that you could put on a piece of paper and get to the underwriting team so we can understand bigger picture.
And same with deals, like a lot of different ways we could look at things. A lot of different ways we can come at it to understand what's going on here, and how can we make this work. We go back to the experience piece if you're really experienced and you bring us a deal that's not necessarily up the fairway, which I've seen quite a few from a lot of our repeat borrowers. They wanna try a different strategy or they wanna go bigger, they wanna build something like that. We're more likely to take a look at those because of all of the different things that you had brought us before.
Brendan: Yeah. And Megan, one thing you said that was interesting. Our typical borrower — we have some that will do one deal a year. They're a weekend warrior. They're cranking out one deal a year and building that nest egg over time. Our typical borrower is more in the three- to four-plus camp with some borrowers doing 30-, 40- a year. So when it comes to a borrower that's repaid us on a deal, how do you guys look at that? ‘Cause obviously that's a gold star on the underwriting criteria, but how much does that repaid deal mean to Fund That Flip? And what message does that send to not only underwriting team, but also our capital partners that we work with?
Megan: I think repaid deals are huge, especially depending on how many deals you have done before. That is definitely a whole level up in my opinion, ‘cause that showed that you are able to execute on the project that you said and exit. Exit is one of the most important things. A lot of people can go out there and do the work, do the construction, build a house, but can you exit the loan?
Can you get out of it?
Can you refi it?
Can you sell it?
Did your ARV build in some of the market changes that we're currently facing where if you sell, are you in the negatives or are you still in the positives?
So to answer your question, that's everything to me. If I could see you exiting similar projects, that’s an A+ to me.
Brendan: Yeah. No, I agree. I think a lot of the borrowers’ experience sheets that we get, there's no question about their ability to execute based on the paper trail. But to see the paper trail come to life and see they're borrowing our money just like they would a private lender in town.
And now that we're building that trust, that's really what it, what it's doing. It's a trust builder with that borrower where we're “Hey, we extended the olive branch on deal number one. You had good credit, you had good experience, but now you've proven that we can work together and have a sustainable relationship because you've paid us back and you made money in the process.”
And it's our value prop from A to Z. Right? Just kind of, fully shown.
Megan: Yeah, and you you hit on something there that I think is really important to say is, these underwriting guidelines sound a little bit tough. You say this to someone who wants to borrow money from us, and they're probably sitting there right now, “Ugh, I don't know if I hit all those things.”
But the reason that we wanna make sure you're a good borrower, that you're gonna exit the deal is because, when borrowers make money, that's how we make money as a business. You know, we want people to be exiting these deals profitably so they come back over and over again, ‘cause that's how we both grow together.
Brendan: I want to dial in on something you said really quick ‘cause I think this is also something that's hopefully not unique to Fund That Flip, but I suspect that it might be. There's been multiple occasions where the underwriting team has underwritten a deal. They've looked at the profit margin. They said, “Ah, man, we're coming in or around where the borrower is expecting. From an ARV standpoint, we have their cost basis, we have their purchase price, everything is accounted for. We have their interest rate, their soft costs, everything that goes into the profitability calculation.” And Megan might reach out to me and say, “Brendan, hey, the borrower's only gonna make 2% or 3% margin on this deal. Can you get this story from the borrower of why?” And there's been a couple occasions where we've gone back to the borrower and they said, “man, I didn't realize my margins were that compressed. Like maybe I should look at this as a rental versus an outsell.” And that conversation stems from underwriting.
And it's what you said, Megan: It's your guys' willingness and commitment to not putting a borrower in a bad deal. So I think that happens more times than not. David, I don't know if you've had experience on the same side with the underwriting team.
David: Yeah, I mean on the sales side of the business, I always tried to get ahead of that. You mentioned just a couple minutes ago viewing it as lending our own money, and that's how I always viewed it. If somebody came to me and said, “I wanna borrow $100,000 to do a flip on this house,” instead of me saying, “well, I'm just gonna lend Fund That Flip’s money so it doesn't matter. Like, let them figure it out. Let Megan and her underwriting team do the thing.” I'm doing my own underwrite on the front end to make sure, if this was my money coming outta my own bank account, would I do this deal?
And then of course if they repay it, then I feel better about doing the next deal versus if they have a lot of challenges, get sideways and they have to extend it three or four times, I'm less likely to lend that next time. Yes, I agree with you on that piece. And then I think you were asking about, like multiple exit strategies. Moving from a flip to a rental, those are conversations I would have with borrowers as well. And then of course with, with Megan and her team on the underwriting side of “Hey, we, we've got multiple strategies here and let's look at the data and see, does it pencil out?” Okay, if the market stays where it's at and he hits where some of these comps are in the neighborhood, it's a pretty decent ARV. He's gonna make a good flip. Now let's, let's, project. Worst case scenario, market takes a dip. He's not gonna reach these levels of comps. But he has some some good lending relationships where he knows he could put a tenant in here, he can rent it out and get some long-term financing and maybe it's a break even for a few years.
But essentially, he's buying himself time then, and he is still gonna find a way to exit our deal and it's still gonna be a successful investment for him. It just may take more time to see that success. So yeah, I'd be having conversations on both sides to get everybody in a good spot.
Brendan: For sure. Megan, if we can, I'd like to transition a little bit from the underwriting conversation to your new role in somewhat of a newer department within Fund That Flip — the Construction Risk team. So, can you just dive in a little bit more, what does that Construction Risk team look like? What's your role and, and also why did Fund That Flip make the decision to have the department structured the way that it is?
Megan: Yeah, I think it's important here to start with the why: Why did Fund That Flip create this department? And to answer that is we look back at what's going on in the market right now. It's no secret markets are trending in the downward direction. Interest rates are up, properties are falling in value.
A little bit depends on the market you're in. So one of the things that we wanted to do is at at Fund That Flip is we wanted to be proactive to make sure we had a really good hold around our current book and the projects that we’re currently holding on the book. So when we created this department, the idea was to make sure that we're consistently mitigating risk of these projects, making sure [we have] full visibility into what's going on, what's gonna happen when they're gonna exit, not just for us, but for all the stakeholders that have part in the loan — capital partners, borrowers, and internal people at Fund That Flip. Right? So I should be able to message to finance something similar to sales to make sure we're all on the same page.
So that's the why we wanted to create this: Visibility within the company to make sure that we have a great hold on what's going on and that we're still mitigating risk the same way. So I got asked a couple months back if I would be interested in the position. I was in the underwriting department doing a lot of property value on the front end, and Jon [Andrews, CRO] and Val [Moses, VP, Asset Management] approached me and said, “Would you be interested in this?”
So I thought about it a lot and I had never really worked with our draw process before. I was a little bit hesitant at first just to step into a new role. But I've found in my life, in general, life islived outside the comfort zone. And so I talked to a couple people and got really excited about it and dove headfirst into this construction risk world.
So what that looks like on a day-to-day is primarily handling our draw process. Borrowers will call up Fund That Flip or our Account Management team and say, “Hey, I’m looking for a draw?” We go send 'em a report. That report comes in and that's where my team comes in; we're reviewing that report, making sure that everything around the borrower, around the deal — similar to underwriting with a little bit of different guidelines — is still within our risk appetite.
It's making sure that the money that they're requesting for that draw is in line with the work that's completed. Making sure that they're not late on any of their interest payments. I like to look at borrowers from a book perspective. How many loans do they have with Fund That Flip? Are they late on any of those?
We don't necessarily hold draws if they're late on another loan, but it's good perspective, and from a risk standpoint and from a leverage standpoint, we could usually have that conversation of “Hey, I've gotta draw for you for 123 Main Street. You're late on 456 Main Street. What can we help you there to get this up to date and then we'll get you that draw money?”
David: First of all, thank you for the synopsis on the new role. I think it's a great thing for the company. I have more perspective on it than some of our listeners do. So for those listeners, right, I think the value to the stakeholder in that position is obvious. You're adding more protection to them and to the loan. But there's also some benefits for our borrowers here, and I think that's what goes unnoticed in some of these changes we're making. Can you talk about that?
Megan: Yeah, definitely. And I think that was actually one of the main changes, is we wanna make sure we're providing our borrowers with extraordinary experiences. And the way we do that in the Construction Risk team is with speed. Borrowers would like their money and their draws, and they want 'em fast. So one of the things that I'm currently working on within this role is seeing how we can change and tweak our current processes to make sure that we can move as fast as possible while still mitigating that risk in an appropriate fashion.
So, for example, we're looking at maybe some different service providers that allow borrowers to take pictures [of construction progress] themselves instead of an inspector. And that's not set in stone yet, but looking at things like that, how can we move faster to provide more value to the borrowers? And I think that's maybe something borrowers are missing, maybe on the front end.
Right now, they are just experiencing the change. It's a pain point. I've felt it, they’ve felt it. But I do hope that they understand. And I hope that our sales team is really communicating that this is for them and we're trying to bring them as much value as possible to make sure they become repeat borrowers and that they have great experiences with us.
Brendan: Yeah, that's a great point, Megan. And I think in addition to the speed, our prior process, we lean pretty heavily into that third-party inspection report [and] we still do today. Right? That's what your team reviews and what they ultimately make their decision off of. So while we're protecting risk from sending a draw, that is overstated from what was actually complete.
We're also doing the opposite. We're making sure that the inspector didn't short-change the borrower. Or maybe they checked the 10 line items, but they missed one. Maybe they forgot to go in the basement, they forgot to go into the the second floor, something, and they didn't, they didn't mark an area complete.
That's where your team comes in and is verifying, “Hey, I think this was missed, or we should tweak this….” The point is, the borrower and the investors in the deal should understand that the most accurate amount is going out each time, which I think is beneficial in both directions.
Megan: Absolutely. I think there's sometimes things that investor, or I'm sorry, inspectors can't see when they get on site. I'm talking plans, permits, maybe some utilities underground, and just because they can't see 'em doesn't mean it's not there. So that's where my team comes in and we can keep that line of communication open and say, “Hey you've got foundation and some of your framing done.”
I don't think that the inspector marks you for plans and permits, but I'm pretty sure you got those if you got a foundation down. Right? So let's get that to the right place to make sure you're getting the funds that you need on this.
Brendan: Yeah. And speak a little bit about the importance of like velocity of cash for the borrower, too. So obviously just from a principal standpoint, they're entitled to the draw funds once they complete the work and that helps them run their business.
But what would happen if we didn't execute on that extraordinary experience for the borrower? What pain is that causing if we don't? Doug [Dvorak, VP, Capital Markets] and you probably know a lot about this.
Megan: Yeah. I mean, these people need these funds to keep their businesses going. We talked about some people are doing this full-time, so they're fronting their own personal money to get these projects to the right spot. So if we're not getting them their money in a timely fashion, that affects them. As people, their business, their personal lives. And we have to have a lot of empathy for these people ‘cause we understand that this is their entire livelihood. And we're in the month of December, Christmas is coming up people are probably running a little bit thin on cash, buying Christmas presents, doing projects, all, all the good stuff.
So I have a lot of empathy to make sure that we're serving these people the way we should. Because like I said, like this is their entire livelihood.
Brendan: Yeah, and I think there's a chain reaction too, that's very, very fragile. But it's again, what we built our business around of Megan, you, run projects on the side.
You have seven units. You've had to GC your own projects before. I mean, if your plumber that you built a relationship with over the last two years is saying, “Megan, I need paid Friday, and if I'm not paid Friday, I'm going over to Duggan's job. And if I go to Duggan's job, he might treat me better than you are and I might not come back.” Right? Like there's always that chance when you have sub-contractor and GC relationships.
So if Fund That Flip plays a critical piece in that somewhat fragile relationship between the borrower and the sub-contractor, we do what we can to make sure that the borrower can deliver on their payment promises to their subs, because that is their ecosystem that allows them to run their business profitably and in a scalable way.
David: Yeah, luckily we are pretty damn good at the draw stuff and taking some actions to get better at it. So I don't get too many calls about it, but every now and then there was that phone call from a really, really stressed out borrower of “I need my money, today.”
Like, you just ordered the draw yesterday, so you'll get it. It'll be quick. But yeah, they run tight. It's a lot of our borrowers are in the risk business as well. They have a high risk appetite and so that often means running lean on cash and kind of maxing out credit lines and doing whatever they have to do — pulling money from personal bank accounts — to keep that machine going.
So, yeah, the draw stuff is huge, and for people [who] are newer to the space and getting into it, I think they start to realize the importance of draws once they're due for that first one. To Megan's point earlier, I think it is important to show them an extraordinary experience. ‘Cause if if you don't, then it's nightmares, right?
Brendan: I know we have a few minutes left here. I was hoping that we could transition into a little bit of a conversation. You talked about how you have a tremendous amount of empathy for our borrowers, and I feel like that empathy from you comes specifically from your experience personally as an investor.
Give Duggan and I a peek behind the curtain of either your most memorable deal, your favorite deal, your most challenging deal — give us a peek behind the curtain of what that looks like.
Megan: Yeah, definitely. So I'll wrap all three of those things you said and [I] know the one deal that comes to mind. So this was a deal that I just did this year. I acquired a property in around… what was it… May, June time, and it was a triplex in the Lakewood area of Cleveland.
Our plan was to actually flip this one, some of the other properties that I acquired before, I did some house hacking, very minor rehabs that I was doing myself, like a coat of paint or like a fix here, there nothing that was a serious rehab. So this triplex, we planned to do a rehab. We were gonna go get some hard money, have them fund a lot of it, so we could put as little of our own money into it as possible.
So this was my favorite because I actually got to see this house that I fell in love with; the second we went into it turned into this amazing project that we had envisioned from the start. So we redid paint, floors, kitchen, bathrooms, the whole nine yards there. So that was really, really exciting and I loved watching the development of that. It was a little bit stressful at times. This was my first time, so there was obviously mistakes to be made. And one of my biggest struggles with this project was with the GC and this was a little bit on him, a little bit on us.
So just from the start, not a lot of great expectations were set. We never made a contract. This was all done over the phone via text. He gave us a quote. I think he did everything. He wrote everything down. He did nothing over the computer, so even his punch lists were handwritten. So a little bit hard to to read his handwriting as well.
So we did a lot of this back and forth, which I think annoyed him a little bit. He wanted us to be more hands off. We were nervous cuz it was our first project. So we had all this back and forth and then, we paid him the last paycheck when we were going through some of the parts of the house that still needed to be done, which was a little bit of a mistake on my part. I should have held some of those funds. But the next day he ghosted us and there was still a couple things on the punch list — less to do, very minor type things, but like things that needed to be done in order for us to get the house rented. ‘Cause our strategy here was to rehab, to rent and refinance.
We were talking about BRRRR before, so I'm coming up to the end of my project. I wanna refinance soon. I wanna get tenants in there as soon as possible to stop the bleeding costs. And my contractor won't answer me anymore. I'm calling him, I'm texting him. I work with a partner. We do 50/50 on everything. She's calling him, texting him, and we're just at a loss of, “what do we do? We've paid this guy, he's not coming back.”
So in this situation, we had to roll up our sleeves and start doing some of the little things. Patching drywall here and there, making sure it looks good, some of the trim needed fixed, and just putting some of the small finishes to make it look rent-ready.
[Those] were the headaches that we had to go through. And what I learned from this experience is on the front end, make sure you're writing down your contracts, even if it's small, maybe you use a lawyer, maybe you don't. Like a contract is a contract and at least it's something to hold each other accountable.
So I could say, this contractor is gonna work on this project for this amount and until its entirety or something like that. And you can get deeper into those depending on the level of complexity of your project. But that was the first mistake. And then we had a pretty good experience with the refi and we used a broker, someone out of Michigan I think, and we must have caught the rates right before they took a huge jump cuz we got a 49 rate on our triplex.
We were able to build enough equity in where we came with no money to close. We didn't season it, which is another mistake that I might consider. Right? So we weren't actually able to pull any money out cause we didn't hold for six months. We did the project in four. So we built all that equity in, but we didn't actually pull any of it out. So it was good and bad. Right?,
Brendan: Yeah, kind of a catch 22 in a way cuz if you waited the other two months to season, your rates would've been higher.
Right. And there's obviously the argument of if you have the cash in your pocket, you can reinvest that and obviously get your return. But yeah, that's super interesting. Megan, I'm curious, just high-level deal breakdown, what was the purchase price? Construction budget, and then what'd you guys end up landing on?
Megan: Yeah, so we bought the house for $240K. We put $40,000 into it, and we got an appraised ARV at $360K. And so where that “not seasoning” helped us a little bit — or it didn't help but, where we got away with it is that $40K budget that we accounted for. We only used about $27K of it, but when we were taking our draws, right, if you know hard money, you still get your full draw.
So we were able to pull a little bit of money out of each draw because we weren't dipping into the contingency the way we thought we would. And we did a lot of the things by ourself, which I don't know if I'll do again. I think I'd rather pay people to do the labor, but we saved a lot of money. So then we did walk away from that deal pulling a little bit of our money out. We had a private investor that was part of it, so we were able to pay them off without really coming out of pocket at all.
David: Yeah, I'm curious, as you continue to scale, Megan, ‘cause I know I know you're not planning to slow down. Are you gonna stick with the BRRRR strategy or are you planning to pivot with changing markets? Like, what's your plan moving to?
Megan: Yeah, I think Cleveland is still a great place for rental market. I think I saw a statistic today that the home prices have only really dropped like three, three and a half percent from the peak in 2022. So there's still a lot of equity to be had in this market. I think I'm gonna stick with the BRRRR strategy.
I am experimenting right now, which I'm a little nervous about, but I'm turning one of the units from that triplex I'm talking about into a midterm rental. So we're gonna be targeting traveling nurses cause we've got such a hospital-heavy industry in Cleveland, families that are in between leases or buying a house and they need to stay there.
So we've got a two [bed] one [bath] in that duplex that we're gonna try the midterm rental. So right now we had a tenant move out at the end of November. We're fully furnishing it, doing some similar type flips. And we're gonna rent that out and see how that does. And the reason we're doing that is because the cash flow significantly increased when you do midterm so that unit I'm talking about, we can maybe get $1100 in rent on a long term, but closer to $1500 in the short term or the midterm game. So we're increasing our cash flow by what, $200, $300. So that’s what we're doing now. I do like the BRRRR strategy. Like I said, the long-term rentals I think are really popular, especially in that west side of Cleveland. A lot of young people wanna move there. People love the Lakewood, Tremont, Ohio City areas. So I'm gonna continue to target those. See when I could buy under the market and build enough equity in my flips and rehabs to make sure that we can keep cruising and scaling.
Brendan: I've heard of a lot of people doing that strategy, Megan, with multifamily in Cleveland? Well, they'll hedge their bets. They'll do a long-term on one unit and either an Airbnb or a midterm on the other unit. And just for the listeners to click into the midterm very quickly.
So that is, I'm asking, so that's essentially anything between like a 30-day up to about a six-month term, right? Somewhere around there? And it's typically less headache than an Airbnb just because there's less turnover, there's less cleaning, slightly more turnover than a long-term rental obviously, but your gross profit is somewhere right in the middle.
So depending on what your individual strategy is, if you're not looking to have to do the hospitality management that an Airbnb requires or hire a manager to do it, midterms like that are right in the middle area where you can maximize your gross profit with doing a more moderate amount of turnover.
Megan: Absolutely. And we're still property managing ourselves, so we get all the fun of that. And I think it's a little bit of a combination of both where you get a little bit more turnover, you're a little bit more hands on, but you can still step away. And I would love to get like six-month type leases in there. So then it's almost the same as a long term.
David: Yeah, please report back on the midterm rental. ‘Cause I'm really curious about it and I gotta imagine there's a high demand for it here in Cleveland and in many markets. ‘Cause I think everybody goes toward either long term or short term, and I think they forget about that midterm space. So, I'd love to hear how it goes. One more question for you, along the lines of the BRRRR. So depending on who you talk to, some people are full steam ahead into it. Some people are backing off of it just given interest rates. But I still think that the people that are full steam ahead into it, they don't wanna leave any money in it. “I still gotta hit these cash flow returns of X.” And they're pretty aggressive.
My thought is BRRRR strategy still works. Right? I think it's, personally, I think it's a smart strategy. But you should expect maybe to leave a little money into the deal, or maybe not the cash flow as heavily. What's your take there? Like what are you preparing for?
Megan: Yeah, absolutely. And to be completely honest, the interest rates don't scare me. We had the luxury of super-low interest rates, but those weren't the norm. So people are waiting for the norm to come back, but we're still in a good spot with them, and there's still really good deals out there.
You just have to buy right. That's where it starts, is make sure you're buying your property right and your numbers work. And on top of that, I try to make sure that I have at least three exit strategies because I know how volatile the market is. If I plan to do a fix and flip but all of a sudden prices in Cleveland start to come way down, I wanna know that my numbers work well enough that I can do a rental and if I can't do that rental can I do the midterm? Can I do the short term? So I try to look at things from those three different perspectives because again, I know how volatile the market is and I wanna make sure I position myself in the best place ‘cause I'm not slowing down, I'm gonna keep doing deals.
I know there's still good deals out there when you're underwriting, best case, worst case of your ARV. And that's how I set myself up for success
David: That's why you’re the best.
Brendan: Awesome. Megan, thanks. Uh, thanks for joining us today. And for the listeners, where can people reach out to you, learn more about you? Instagram, email, whatever you wanna drop, drop it.
Megan: Yeah, absolutely. So you can reach me via email if you have any questions or just wanna connect. Also reach me on LinkedIn, so Megan, email@example.com, and find me on LinkedIn the same way. Megan Sarles and connect. I'd love to talk to people, see what other people are doing in Cleveland projects. Talk about real estate. It's a huge passion of mine and I love seeing people around me do the same thing.
David: Awesome. Thanks again, Megan. I will go ahead and sign us off. So for Brendan Bennett, for our wonderful guest, Megan Sarles, I'm David Duggan. This is Real Estate Investing Unscripted.
Thanks for tuning in, guys.
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