He's an entrepreneur, an expert on the market, and he's been a friend of ours at Fund That Flip for a long time. As the author of five BiggerPockets books on real estate investing, we KNEW we had to get him on the show.
We are so excited to bring you this special two-part episode of Real Estate Investing Unscripted with the one and only J Scott. Make sure to subscribe wherever you listen to podcasts so you don't miss out on part 2!
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Welcome back to another episode of Real Estate Investing Unscripted. I am your co-host, Brendan Bennett, VP of Revenue for Fund That Flip, and with me is your other co-host, David Duggan [Midwest Regional Director]. Dave, we've got a pretty, pretty special podcast recording today. So special that is going to be a two parter.
I'm excited and we're going to be here a while at least you and me and our guest here. So let's strap in and let's get to some good content here. What do you think?
Let's do it, man. I'm pretty excited. I think we'll kind of deal with the first series more around borrowers, developers, people that are executing real estate day in and day out. The second piece, our guest has a lot of experience on the back side of the real estate business as well on the investing syndication, entrepreneurship. Couple of cool things that we'll talk about in that episode as well.
So let's let's bring him in.
Without further ado, I'll go ahead and give you an intro here, J. We have J Scott on the podcast. Yes, he does go by J. He's got quite a list of accomplishments here. So I'm going to, I'm going to list off his bio here as quickly as I can and try and touch on all the high points. So he's an entrepreneur, an investor, an advisor, an author, and a partner at Bar Down Investments.
He's focused on buying and repositioning large multifamily properties in the past 14 years. J has bought, built rehabs, sold, lent on and held over 150 million in property around the country. He holds strategic advisor roles in several companies and is the author of five BiggerPockets Books on real estate investing, including the best selling The Book on Flipping Houses.
Find out more about J and connect with him at ConnectWithJScott.com. J, welcome to the podcast.
Thanks, guys. Thrilled to be here. This is exciting.
Welcome back to the podcast. So you were on one of the original recordings with our CEO, Matt Rodak. I think we looked it up. Episode four. So for those of you that are listening now, a throwback to maybe a 2019, 2020 recording back in episode four with J and Matt. So, J, I'd like to kind of start off on, you know, you have quite a bit of experience on the fix-and-flip, the new construction, the [active] investing side of the business.
I think for this first part of the conversation, what I'd really like to boil down in and I know your books probably cover a lot of these topics, is what are the couple of key things that someone that's either getting into flipping or developing or maybe someone who's somewhere in the middle, maybe two to five deals a year, somewhere in that space.
What's what's a couple of tangible things that people could take away on how to scale that next level?
So I think it really all boils down to one thing. When I started out in this business in 2008, I came from a corporate tech background. I had managed large teams. I knew nothing about real estate. I mean, I did my first flip and my wife still jokes that I could barely change a light bulb. In fact, today I can still barely change a light bulb. I've got an electrical engineering degree and I can't change a light bulb.
But here's the thing. I was never good at the real estate side of real estate. What I was good at was the business side of real estate. And because I was a good business guy, because I was forced to focus on the business side, because I didn't know how to hire contractors, I didn't know how to manage contractors, I didn't know how to do renovations. I didn't know how to do anything real estate related.
When I started, it forced me to kind of focus on the business as a business, and it forced me to bring in people to help me do all those things that I couldn't do. And so what I would recommend anybody that's starting out now, if you have a background that's in real estate, if you have a contractor background, or an agent background, that's great. Leverage that. But at the same time, you really have to focus on treating your business like a business. Being a business person and really learning all the aspects of running a business, cause it doesn't matter if you're running a fix and flip business, a multifamily business or a restaurant, want a used car dealership, whatever it is. Businesses are the same.
You have to deal with things like employees. You have to deal with supply chain issues. You have to deal with accounting. You have to deal with HR, you have to deal with cashflow management, you have to deal with marketing and sales. You need to deal with with fulfillment issues. All of these things are common to all businesses. And so if you can be a good business owner in general, you can start to flipping houses business, you can start again a multifamily business, a self-storage business, whatever it is. And you're probably going to be successful because you understand the basics of building something that creates and sells a product regardless of what that product is.
So the first thing I recommend to anybody that's out there is learn the business side of things. Take an accounting or a finance course, take a course to understand financial statements, read about like how how marketing works and sales work and don't be scared to go out and learn how to hire employees, even if they're just part time. These people that can help you because few of us are really good at everything in this business.
Your job as a good investor is to focus on bringing together those people that are really good so that they can they can run this business for you while you're focused on the strategy and the high level stuff.
Yeah, J, I love that. I feel like one of the challenges is that a lot of people in business at large, but more specifically a lot of the the borrowers that David and I speak to on a day-to-day basis, they — most of them want to scale, not all of them, but majority of them want to scale and get to that next level. And they don't know what they don't know about the next stage of the business, right?
So there's a couple of people that maybe they're doing two to five deals a year and they think they're being efficient with their time, their processes, whatever it might be, but it’s just amplifying it just up one notch. And kind of taking that first step and and hiring someone, delegating whatever that case might be.
Another thing that I want to ask you, J, so a lot of borrowers are telling us right now there's there's three main components, right, to running a successful fix-and-flip or development business. You've got to find the deals. You've got to find the money, and you have the team to be able to execute on those projects.
So this is kind of a loaded question, J, but I'm curious, of those three, how would you stack, rank those by by way of importance? I have a perspective, but very curious to get yours.
So first, I would I would start by saying I always segmented my business into four campuses, and I think this is the first piece. Anytime you start a business, if you go to— I worked for Microsoft for a long time, so you go to a big tech company like Microsoft, you go to again, to a restaurant, you go to a car dealership, whatever the business is, they're going to have distinct pieces of the business and they're going to segment their business by these pieces.
So again, I was in the tech world, so there would be the engineering group and there were the people that actually wrote the code. There’d be the product, the people that actually decided what the product was going to be. There was the salespeople, there was the marketing people, there were the HR people, there were the quality assurance people, there were the customer service people.
There are all these different groups and the people that worked in marketing were never going to go and start writing code. And the people that were writing code were never going to go like, start doing sales. Everybody had their role. And the reason why big companies are broken down like this is because we realize that some people are good at some things. Few people are good at everything.
So the first place to start when you're [...] creating any business is to figure out what that segmentation looks like. And if you want to have three pieces of the segmentation, great. I chose to have four in my business. If I were doing a rental business, I might actually add a fifth.
But in my flip business, yeah, [number one] was acquisition, so finding the deals.
Number two, it was finding the money or raising money.
Number three, it was being able to do the rehab, the work, put the property back together, create the product, essentially.
And then I had a fourth bucket, which was disposition and sales, marketing and sales.
Now, today, this is a pretty easy thing because, I mean, you put a house out on the market, not as easy as it was a year ago, but it's still pretty easy. You list a house and put it on the MLS and you can get lots of buyers.
I started back in 2008 and when I started it was literally there'd be 100 houses for sale in a ZIP code and there were three buyers. And so if you didn't have the best product at the best price with the best customer service, you weren't going to sell your house. And so we had to work really, really hard to sell our products, to sell our houses back in 2008, 2009, and2010. So we really had to focus a lot on that marketing and disposition and sales piece.
So we always had four pieces. Now, in terms of what piece is the most important, I don't think any of them is the most important because this is, this is a machine. And just like any machine, you take out one cog, you take out one gear, you take out one piece, and the whole thing stops working. And so certainly there there's another answer to that question.
But in general, the most important piece for everything, everything is the most important. But if I have to answer, what is the most important piece? My answer is whichever is working the worst, whichever one is giving you the biggest issue and roadblock right now, whether it be in terms of time, money, effort, expertise, whatever it is that's keeping your business from scaling, that's the thing that's most important.
In fact, there's a great book. It's called The Goal. It's written by… I can't think of his name. I have a copy in the back. It's probably one of my favorite books of all time, but it's called The Goal. The subtitle of the book is The Theory of Constraints, and the book is all about basically scaling your business by figuring out what the biggest roadblock in your business is at that particular moment and solving that roadblock and then moving on to the next one and the next one, the next one. And it really gets you to realize that a business, again, is really just a series of pieces. It's a machine. And if anything is failing, if anything is not working as well as everything else, the machine is going to break down.
They actually use an analogy in the book of imagine an elementary school full of kids that are marching through the forest and how fast are they going to go? They're going to go as fast as the slowest kid because you can't let any of the kids fall behind. One of the teachers has to stay behind and kind of make sure that that slowest kid is still safe and keep everybody together. And so if you want to speed up the group, the way to do that is isn't to make the front of the group faster, to make the thing that's working the best go faster. The way to do that is to speed up the slowest kid in the back, the thing that's working the worst. And if you can get that slowest kid no longer going [...] the slowest, then focus on whoever is now the new slowest and keep doing that, you're going to get that group to really march in sync and speed up.
J, One of the things that fascinated me most in listening to the original podcasts that you do with us is actually very much related to what you're talking about now.
[Y]ou've got a very deep understanding of all of these different cogs within a business, and the importance level of all of those. It sounds like when you jumped into real estate, maybe you didn't have a full understanding — at least when it comes to real estate — of what all those cogs would be. I think you mentioned your words or something. Like you were pretty naive to the space and it seemed like a good idea from watching HGTV and a really interesting time to invest in real estate. And so you just did it right?
Can you talk about that and then how you went through and learned all of those different pieces or kind of the the bumps and bruises you took along the way?
Yeah, I did the proverbial jump off the cliff and build the airplane on the way down. And again, a lot of it was just recognizing and admitting that I didn't know what I was doing. And so a lot of people come into this business and they're insistent on they've got to do everything themselves to save money, or they've got to do everything themselves because they don't trust anybody else, or they have to do everything themselves because they think they don't have another choice.
But the reality is there is another choice and the other choice is to surround yourself [with] people that know what they're doing. So the first project I did didn't go particularly well, but by the time I got on to that second project, I realized that I needed to bring in people to help me. So I by the time I did that second or third project, I had hired my first employee. And I'm not saying you have to hire an employee. There are other ways to get help in your business and we can discuss that. But what I did was I hired my first employee around the second or third flip, and that was a project manager, and that was the person that I brought in to help me do that.
One thing that again, was the big constraint in my business…. It was the one thing that was keeping me from my business working really well or even semi-well at that point, which was managing the contractors, finding the contractors, figuring out the scope of work, and managing the contractors. And I knew if I could bring that person in, then I could focus on the stuff that was actually going on at the time, finding deals and raising money. Back then, it was easy to find deals. I could literally throw a dart at the A listing on the MLS and whenever it hit I could probably negotiate a decent deal. The hard part was getting it renovated and getting it sold on the back end and raising the money to buy the deal. So I brought in somebody to project manage, which was kind of that first really tough thing for me.
After that, the whole rehab side of things got really easy, and so then I had to focus on the next piece, which was now that we had a couple of properties and we're actually, like, renovating them well and we were ready to sell them, how do we do the marketing? And so I found a really good real estate agent who I said, “Hey, let's form a partnership up. I want to give you all of my listings. And all I ask in return is you help me, like really figure out a great marketing strategy.”
And she did she help me figure out a marketing and branding strategy where again, these days it's easy to renovate how she put it on the market. People buy it back then. If you wanted somebody to buy your house, you really needed to have something that allowed you to stand out. And for us, that ended up becoming our brand, like literally you would walk into five of our renovated houses, they would all look exactly the same. We'd have the same cabinet, we had the same flooring, we'd have the same paint colors, we'd have the same fixtures, we'd have the same everything.
And so somebody knew if they walked into one of our houses and they said, “This is great, I like this, but the house isn't the right size or I don't like the location or I don't like something… I don't like two-story. I want it to be a single level house, whatever it is.” The agent can basically say, “I have an exact same house or basically same look and feel the same quality of renovation, but it's in this part of town, or it's this size or it's this style of house.”
And it was great. We could take buyers who weren't interested in a particular house, not because they didn't like the house, but because they didn't like something else and we could transfer them over to another house. And back then that was really important because there were so few buyers out there.
So that was the second piece for me: It was really figuring out how to get houses sold. So now I had figured out the renovation piece, I figured out the sales and the marketing piece, buying deals, acquisitions were still really easy, but that's when the raising money part started to get difficult. So that's when I started going out and interviewing mortgage brokers and bankers and banks, and that's when I found a really good banker who was able to help me on the raising money and funding these deals. And I partnered up with this guy and he was he was a VP at a local commercial bank. And he basically said, “Look, we can do a lot of these deals for you. We like what you're doing. We like your systems, we like your processes, we like the numbers and how you underwrite your deals. Work with us exclusively.”
And so we got a lot of loans from that bank. So now I solved that problem. Now, by this time it was somewhere around 2012 or 2013. And at this point, getting deals became harder. Everybody was buying deals off the MLS and suddenly we were hearing talk of these things called short sales. And everybody saying the way to get deals these days is MLS, REOs were just way too hard. Now we need to go do the short sales and to do short sales, you basically have to do this direct marketing thing. You have to go and send direct mail and make phone calls or whatever. So I found somebody who was really good at direct mail. He had done direct mail for some other industry. I don't remember what it was, but I basically said, “Come in, be my marketing person. I'll give you a commission on every deal we buy.” And so he came in and he started sending literally thousands of direct mail letters a month starting day one. And I didn't know anything about direct mail. I didn't know anything when somebody called how to pick up the phone and negotiate over the phone.
These things, all I had ever done was I bought foreclosed properties from the bank at auction. And so… but I knew I couldn't do this. But I brought in this guy and he helped me do that. So now I had the fourth part of the business kind of running well. And at this point, well, I'm sure something else broke and I fixed that and [then] something else got broken. I fix that. But basically, it was this idea that I can't solve these problems myself. I'm not smart enough, but what I can do is I can find people that can help me. I can bring them in and I can let them solve the problem, and then I can move on to the next problem and figure out how to solve that. And then the next problem, do that.
I was the CEO and unfortunately, I don't see a lot of of investors these days, when you ask them, like, what do you do? They don't describe themselves as the CEO. They might use that title, but you ask them what they do day-to-day, and they're out there working with contractors or they're out there like, going to auctions and buying properties, or they're out there showing buyers their properties, trying to sell their properties. They're not acting like a CEO. And so when I recommend everybody out there is you want to call yourself a CEO, that's great, but act like [a CEO].
I think it's a great point, J, when you develop these systems and processes, I think people are surprised sometimes at how quick you can outgrow them, right? You might come up with a really great direct mail campaign If you're looking to do five deals a year, that part of your four-spoke wheel that you talked about could be really strong and you have a weakness in another area. Maybe it's dispo, maybe it's the renovation. If you're now trying to do 20, 30, 40, 100 deals a year, that marketing strategy that was strong at that scale may now be weak. And that's what a lot of businesses in general, it's this constant ebb and flow of “we've elevated this piece to the level or above where we need to get to. But now we've raised our level from a revenue or volume standpoint and we now need to up the ante. We got to go back and renovate,” so to speak, that process that once served us pretty well.
Yeah. And what I found is doing that first piece, which is segmenting your business into components, really allows you to do the scaling a whole lot easier.
Suddenly I'm thinking of my business as finding deals, raising money, renovating property, selling properties, those four things. Now, I can say for each one of those four buckets, how do I scale? How do I then take the acquisition piece and get as many properties a year as I possibly can?
At the same time, I obviously need to to fund those deals. So I now focus on the funding side and the raising money side. How do I scale that piece of the business as much as possible so that I'm getting as much money as possible now? I have lots of money to buy properties, I'm getting lots of properties, but I need to scale that piece of the business that's renovating the properties and I need to scale the piece of business.
So and each of those scaling processes is going to be different. The way I scale the acquisition side of the business is going to be a whole lot different than the way I scale the raising money side of the business. But that's a nice thing. I've now segmented my business into the short part and now I can focus on scaling each component separately.
David, how great of a point from an applicable [take]away is that for a lot of our borrowers that we work with? I mean, if you asked some of your borrowers that you work with, “Give me the four or five segments of your business which would allow [you] to do a root cause analysis, identify the problem, be really tactical with how you adjust their strategy…” I'm sure we have a good number [of borrowers] that had it broken down that way. There's a couple that are maybe a little bit near there, like “I invest in real estate. I have I have one core function and it's very general,” right?
I mean, it's the interesting thing about what we do[.] Our purpose in the real estate space is to help people scale, right? Be a reliable financing partner.
So when you take somebody that is maybe doing one deal at a time and all of a sudden you scale them up to the point where they have to have these systems and processes in place, and they have to have them buttoned up and they have to have [...] the pulse of the real estate market and understand that it's not just a binary thing of like, “Hey, I got this stuff figured out, it's done and I can move on and [...] go to the beach.” But then my processes are in place like, “No, it's got to be under constant adjustment. And you’ve got to be tweaking things constantly.”
J, I'd be curious to hear your opinion on that as well, because as you've mentioned, you can buy in any given market or sell in any given market, but it's never the same. [R]ight now, we're in kind of a transitioning market, right, going from seller's market to buyer's market. But there’s still that push and pull, and I'm sure you've had to make some adjustments, and tweak some of your processes and scale your teams differently. What's your take on that? And maybe… what's your take on the perspective of scaling back your operation or ramping it up at this point in a transitioning market?
Yeah. So now is certainly the hardest time to be flipping houses. So yeah, we talk a lot about that economic cycle. Things go up, we hit a peak, things go down, we hit a peak, things go down, peak or bottom, and things go back up, and that cycle repeats.
And what I like to say is there's generally not a horrible time to be flipping houses.
If the market's going up, that's great. You buy low, you sell high. If the market's going down, typically there are some great deals out there. Obviously, you have to factor in the concept that the property is probably [going to] be worth less or the market value is going to, in general, going to be worth less or be lower after you buy the property. So you have to factor that out. You have to buy it well below market when you buy it, but you can buy properties on the way down because generally there are a lot of sellers who are desperate to sell. The one really hard time to buy is when you're right at that peak. And I feel like to a large degree, yeah, we kind of might have gone over that peak a little bit earlier this year.
We've seen values drop a little bit, but certainly we're going to see more of that in some markets over the next few months. So now may be the hardest time in the economic cycle to to flip houses. But here's the nice thing. That peak is the shortest part of the cycle. That peak is probably going to be three to six months. Typically in a typical cycle, it's it's six to eight years, maybe five to eight years. Most of that three quarters of that is kind of going up, which is great. Best time to flip. And I'd say most of that other quarter is on the recession side. The downside and, again, not a horrible time to flip because you can generally get some really good deals, but you will spend a couple of months kind of at that peak where you really need to figure out what's going on.
And so what I would say to anybody that's out there, if you're a little bit concerned about the economy right now, if you're not really comfortable flipping right now, nothing wrong with that. But now is a great time to be working on these systems in these processes and building relationships with your vendors, with your with your your your lenders, with your real estate agents, with your contractors, with everybody. Because in three or six or nine months, whenever it is, we're going to start seeing some really great deals. And that's not the time that you want to start learning. You don't want to start this process when the deals are out there, you want to be ready to jump on them. And so for anybody that's listening, start building those relationships now. Start building that business plan now. Start figuring out how you're going to scale and getting all the pieces in place now. Because in a few months when the deals present themselves, you want to be ready to give.
This goes back to your CEO mentality because I think if you're someone who calls yourself the CEO of your real estate business, but maybe your core function is being on a job site, you might not have any active job sites going on right now. So you have to find other areas, non-property focus, non-showing-up-at-the-jobsite focus to really amplify your business when we're ready to flip the light switch and we're ready… start to turn on the volume.
So I think again another great takeaway for for people listening, probably regardless of what stage of business they're at, I mean there's always room to up the ante when it comes to you working on your business instead of working in your business. So I think that's a great takeaway.
Yeah, and I probably talked about this, I don't remember, but I probably talked about it on the last episode that we did a couple of years ago. But you have to look at what the highest value use of your time is when you're working in this business or any business. And so I like to say that if you're on the job site and you're doing something yourself, the amount you're working per hour is whatever you're saving per hour.
So let's say you go and decide to paint your own house. How much can you hire a painter for — $25, $30 bucks an hour for a good one? Well, if you're painting your own house, you're basically earning that $25 or $30 an hour that you're saving. Did you get into real estate to make $25 or $30 an hour? Maybe you did. And if you did, that's great. Or maybe you love painting. Like that's just something that you're passionate about, then great, paint the house. But if you got into real estate to make a lot of money, to make $100 an hour or $200 [...] or $500 an hour, don't focus your time on doing $30-an-hour tasks. Focus your time doing $100-, $200-, $500-an-hour tasks.
What are those? $100, $200, $500-an-hour tasks? Really? There's two of them. One is finding great deals and two is finding the money to buy those deals. If you can be the CEO of your business and you spend, let's say, 20 hours finding a great deal and you spend 20 hours finding the money to to buy that deal, and that deal generates $40,000 in return thanks to all the work everybody else is doing. You've now generated $40,000 for 40 hours of work, one-thousand dollars an hour. If you were out there painting a house, were managing a contractor instead of finding the deal or finding the money… Well, now you're making $25 or $30 an hour. And again, we're not in this business to make $25 or $30 an hour. Focus on the things that make the real money for your business.
So let's talk a little bit about that, J, because I heard you mention that on the previous podcast as well. And I think it's a really good point. There's a lot of people that we work with that spend their time in the business versus on the business, spend their time in the property. A lot of them come from the trades and create house flipping businesses, which makes sense.
And it's a mental struggle for them to get out of that. But then you look at somebody like you who is, — you scaled your business to a very large operation. So even those $500 an hour or thousand dollar an hour task, are you still very hands on with those or do you actually outsource that as well and still focus mostly on high-level strategy? Like, [...] are there things that you're still in, the day-to-day task?
So these days I'm not doing a lot of house flipping. We transitioned to multifamily back in 2018, but I can still answer that question because we have the same issues in the multifamily space these days.
We buy 150+ unit apartment complexes, and I have a business partner, and we have we have a bunch of employees, we have a team, and we buy these large apartment complexes and at the end of the day, the way our multifamily business is structured is my partner actually is responsible for everything acquisition- and and management-related. I'm responsible for everything raising money related. So we basically have segmented the business into — it’s one business, but we often treat it like two separate businesses.
Here's the thing. She could go out and find ten deals right now. Maybe I can only find the money to finance five of them. Well, there's still ten deals. She's going to go somewhere else and find the money. And so she doesn't have to rely on the other half of the business to fund the five other deals. If she can find more deals, then I can find money. Or maybe she only finds five deals. I find ten deals worth of money. Well, I'm going to fund those five deals, but now I have all this extra money.
I'm not just going to say I'm not going to spend it. I'm going to go find another partner to work with and deploy that capital in somebody else's deal or somebody else we can partner with. And she recognizes that. And I recognize that her job is to scale that acquisition side of the business much faster than I scale the money side of business. My job is to scale the money side of the business much faster than she scales the acquisition side. Hopefully we scale and sync and we do all the deals together, but if for some reason we don't, there's nothing wrong with having extra money and then partnering or having extra deals and then finding another source of money, we can do that.
So those are still the two single most important things you do in your business: You find deals and you find money. And to this day, and probably for as long as I'm in this business, those are things that we're going to have our hands in directly.
Not saying that I'm necessarily the person that jumps on every phone call with every investor, not saying that she's necessarily the person that’s on the phone call [with] brokers getting deals, but she has her hands in every aspect of acquisition because that's her team. And I have my hand in every aspect of raising money because that's my team in my responsibility. And those are literally the two I'm going to say most important things in the business, along with obviously the management of the property when we have IT acquisition and money are the two most important things in the business.
Does that create almost a competitive relationship in the business of like, “Hey, I've got to make sure I'm keeping up with her?” And so, you know, there's a there's a little fire under my ass to get out and go raise some money and find some great financing relationships?
Absolutely. And we're constantly talking about the fact that how much money do we have right now? How many deals do we have right now? And I hate it when she has more deals than I have money and she hates it when when I have more money than she has deals. And it really… yeah, it's a competitive relationship and it forces us to be really good and figure out how to scale our businesses really well.
But it is interesting that you look at our business from the outside and we're one business, we're Bar Down Investments, but if you were internal to us, you almost feel like it's two separate businesses that we're running. And she's the CEO of her business. I'm the CEO of mine, when in reality, obviously we're working towards the same goal. But we recognize that we can both be… one can be more successful than the other. And then we have to find ways to benefit the business, if one side's more successful.
I think it's really interesting because it relates to Fund That Flip and in a really strong way. So we have two main segments internal at Fund That Flip, which is our Sales and Origination group, which is what Dave and I focus our time on. Then we have in our Capital Markets [and] Investor Relations team where their job is to go out and raise money from all these different pools with different appetites to make sure that when Sales brings a deal, we have the funding to be able to give the borrower [...] the terms that they want.
So I think it's… we run the same business that our borrowers run, just on a different scale. And I think that's what's really interesting is we understand that process of finding a great deal. You have to go find the capital to be able to execute that deal. We run the same business. We're just doing 300 to 500 runs a month.
And it's a similar [process] in any business we get in; real estate is no different than any other business out there. Typically, we talk about it as product and sales, not acquisition and capital raising, but it's the same thing.
There's one side of the business that's trying to create the best and most versatile product out there, that's a fit for the market. And there's another side of the business that's trying to sell that product as much as possible. And if you sell more than you can build or that you can design, or if you can… [I]f you have demand, if Apple has demand for the next iPhone, but the company can't can't build the next iPhone, well, they're screwed. Or if they have lots of iPhones that they've designed, but the sales team can't actually sell them, they're screwed.
So it's really, every business kind of faces the same thing. Maybe it's a different terminology, but it's this kind of… this internal struggle in any business that the two sides need to keep up.
J, stick it on the money-raising side of things, I'm really curious. So you've been in the game since 2008 on the fix-and-flip side. I know you transition[ed] a little bit more to large multifamily, but you've been in and around Fund That Flip close to when Matt [Rodak] started right back in 2014, 2015. I'm curious to get your take, from a one to four family investor standpoint: How is the evolution of hard money and access to money in the space evolved from 2008 to 2023?
Well, yeah, it's changed a lot and well, now I shouldn't… It's interesting. It's changed a lot in certain ways. It's changed very little in other ways. Certainly there we've evolved in terms of those opportunities to acquire funding and financing. And so we didn't have crowdfunding back in 2008. I remember sitting down with with [Fund That Flip CEO and Founder} Matt [Rodak] in 2014, he took me out to lunch in a Panera and he pitched this idea and I remember thinking, “Huh, this is great. This could be a game changer.”
And so yeah, things have changed in that respect. In other respects, things are pretty much the same as they were. I mean, when you look at the availability of financing, you basically have a few options. You can go conventional lender, you can go portfolio lender, which are these small local banks that lend their own money. You can go private lender, which is either friends and family or maybe a hard money lender.
And so now we've added crowdfunding and a couple other things. But the choices out there are are basically the same. The question is and again, for anybody out there that's looking to scale their business, the question is which of these is really going to allow you to scale the most efficiently and the most quickly?
And so I'm not going to say that there's one right answer for everybody. Maybe you have a great relationship with that local portfolio lender and you're going to do all your deals in one area and they're willing to fund the next 50 or 100 deals. You do great. Go work with them. Though what I found is these days, portfolio lenders have started to shy away from these fixed flip loans.
Likewise, if you can find a great hard money lender that can finance 50 deals for you and make it really easy, great, go for it. But again, it's really hard to find hard money these days that can scale to that many deals. Most of them are working with either their own money or they're raising a small fund. And so they can't scale with you.
And that's one of the reasons why I love the idea of Fund That Flip. And I'm not just saying this because because I've worked with the company and I know Matt and I know you guys. If I were starting out today, this is where I would start. I would start building a relationship with you guys because I know, number one, you're going to lend all over the country so I don't have to worry about if I add a separate market that I'm now going to have to go find another source of funds for that market, too. I know that you're not going to run out of money — if I want to do two deals or 20 deals or 2000 deals, you guys will be able to fund it. And three, I know that the process is really nice and consistent and if I can get through underwriting one time, I'm going to get through underwriting the next or 100 times a whole lot easier.
And so it's again, we talk about scaling each of the components of your business. If I were going to start today, the money raising side of the business, I'd probably come to you guys and say you're my solution for scaling.
Well, we appreciate that endorsement. I think I think a lot of people starting out surprisingly don't know that hard money exists and they think that they still need to go to the local community bank or the local credit union, get a 20% down loan, save up the funds to be able to run the renovation project. Very traditional in that sense.
I think gladly in 2023 there's a lot more awareness around hard money in the private money space, so makes David’s nice job a little bit easier — on one hand because people have awareness to it. On the flip side, a lot more competition, right? There's a lot more hard money lenders, private lenders in the space. Right. This is an interesting area. These developers know what they're doing. They pay the interest rates. The coupons are strong relative to other investment classes. But yeah, I think we… the thing that we really try to focus on is understanding that investor’s core goal and their core business function because it's not a one size fits all mentality.
We have five different investors that come to us. We give them five different places of how they can leverage us to scale. And I think that's really important.
I just wanted to chime in with one thing I took away from both of your comments there. It's that we've talked about keeping your finger on the pulse of a market, [a]nd making sure you're buttoning up those system and processes.
Well, the other thing that I just heard is make sure you're taking some time to grow and nurture relationships with all of your different vendors, including your financing partners. Because, J, I'm sure you can speak on this: You've probably had good relationships with banks, and all of a sudden their appetite for whatever you're investing in has changed due to market conditions, and they may not have an appetite for it anymore. So you may have an expectation of, “Hey, I've got financing locked up over here,” but now they they don't want it anymore. So I've got to have a few more lined up over here that say, “Hey, we're still still in that game. And, you know, we want a chunk of what you're doing over there.”
Oh, absolutely. And I'd say that for every aspect of your business, not just the financing, is that you need some redundancy. We talk about scaling and one of the keys to scaling is having this redundancy because at some point something's going to break. At some point you're got this great ten crews of contractors working and five of them are going to go away for some reason. Or you've got this great real estate agent that's able to sell all your houses, but she gets pregnant or he gets hit by a bus and suddenly they they're not around anymore. And so there needs to be some backup plan. And if you don't have the backup plan, again, if you have four components to your business and something breaks in one of them and you don't have a backup plan, well, now you've derailed your entire business because one small part has broken.
And so it's really important [...] [t]o have that that contingency. So whether you're working with Fund That Flip and you want to have a backup, a local lender for some reason FTF can't come through on a particular deal — great. Or the other way around you're working with a particular lender that you like and you think, “this relationship is great!” Well, one day that guy could run out of money, and you want to have somebody in your back pocket that you can call up and say, “I've got a deal closing in two weeks and my lender just backed out. What am I going to do?” And so, yeah, have those contingency plans, build those relationships.
And let me tell you something, The nice thing about this business is anybody that's professional is going to understand that they may not be your go-to on day one. They understand that they need to earn your business. They understand that one day you may call them because you're in a pinch, and they're going to be ready to respond because they hope that a week later, a month later, now they're your go-to. And so yeah, don't don't be scared to to to say, “hey, I'm looking to build a relationship. I have other options right now, but let's talk, let's stay in communication because you never know what might change down the road.”
Yeah. J, I think it might be surprising to some people listening, but that's how David and I try to instruct our sales team to approach the greater market. We don’t have to be everybody's first choice, and the person that's getting 100% of their wallet share on every deal. We know that timing is really important. Relationships are very important. And you know, if someone's got a deal now that we want to do and they want to deal with us, we're happy to do it. We also understand that for every one person where the timing doesn't make sense there's ten behind it where the timing does. So to your point, sometimes Fund That Flip is in that option B camp, we're not always option A, but we're okay with that because oftentimes option B ends up getting a chance to be option A. And that's that's basically how we run our business.
Yeah. So some of the best vendors that I work with today, I wasn't working with when I first met them and they came through for me when I needed them to and I realized, oh, they were the better option and now they're my go-to vendor. And so yeah, build those relationships now because you may need them.
J, Last question for you: On the topic of real estate investing from a borrower, developer, flipper standpoint. So a good chunk of the borrowers that David and I work with, and a lot of people [on] the team, they eventually evolve — not all of them — but some of them will evolve and go out beyond the one-to-four family space. You're a great example of that. You were doing a ton of single family fix-and-flip. You're now into the apartment world. I think what would be really interesting is — to me at least — that transition from one to four to 150… it's like a black box. It seems like you see someone who's doing fix-and-flips and then, you know, one to two years later, they're doing these huge apartments. That's the kind of scale that I'm really curious about. I know it's not like you go to sleep one day doing fix-and-flip, you wake up the next year in an apartment. But can you break that process down a little bit for people that transcend up to that next level from a unit count per property?
Yeah. So first of all, keep in mind that well, let's start with the components again. We talked about in flipping the components are finding the deals, finding the money, getting the renovation done and selling the property. Well, when you go up to 150 units, 500 units, however many units — that break down is exactly the same.
You still have to find the deals.
You still have to find the money.
You still have to do the renovations.
You still have to be able to sell because these are multifamily residential properties that we typically hold for three to five years.
There's actually a fifth component, which is all the management side of things. You have the property management like dealing with the day-to-day tenant issues. And you also have this thing called asset management, which is basically you're the CEO of the business plan. You're trying to figure out how to take it from a $10 million asset to a $20 million asset by increasing income and decreasing expenses and all that. So there is that fifth box, but otherwise it's exactly the same.
Now, obviously things are different. The way you acquire a single-family or four-family is different than the way you acquire a 150 unit. The way you acquire a $100,000 loan is different than the way you acquire a $10 or $15 million loan. The way you renovate obviously is different, etc., etc. So there are different ways to scale and manage each of those components, but the components are actually exactly the same.
Now here's what people tend to to not realize and what I actually love about multifamily. In the single-family space, as the CEO of the business, you're typically the CEO of each of those four components. You're the person that's figuring out— you may not be doing the acquisition, but you're figuring out how and you're hiring somebody to do it. Or same with the capital raise. You may not be doing it, but you're kind of overseeing. You oversee all four of those pieces.
In the multifamily space because things are a lot bigger and a lot more in-depth and take a lot more time and energy and knowledge. You're rarely going to be the CEO of each of those components. And so I mentioned earlier that my partner is kind of the CEO of the acquisition side, and I'm the CEO of the money raising side. So when… and then we have other people that are kind of focused on the management side and the disposition side and the construction management side, the renovation side. And so what is the biggest difference when you go up into these big deals is you go from, kind of, doing everything yourself to— you have to have a team and it's not just you're the CEO and everybody's under you. It's a team of peers that are all really good at some function because nobody's going to be good at everything. No matter how good you are at single-family, you're never going to be able to raise money for multifamily and find deals for multifamily. It's just it's two full-time jobs. And so what you learn is you need to get really, really good at one thing and you focus on it. And then you find a way to bring other people together who are good at all those other things, and you work together as a team to bring down these big deals.
And so that's the biggest difference between single-family and the big stuff. The commercial stuff is that it really is a team sport and you have a very specific role to play and you have to find other people who are also rockstars at each of the other roles and bring them all together. So it's really— it's like for me, it's like going from being a solo singer, Celine Dion or Billy Joel to forming a rock band and everybody needs to be the best on their instruments if you want that band to be good.
Yeah. And it almost forces delegation too, right? So those that are really good at systems, processes, delegating. You mentioned, J, there might be someone who likes to paint the walls of their own fix-and-flip property. Probably not doing that 150 units, right? I mean, you could, but it might not make sense.
Is there one quality you can point to in yourself where you go back and you're like, “this is the one quality I've identified that helped me scale up” or the one thing I was really good at, whether it's the relationship building, the numbers side of it?
So the one personality trait is I'm really good at acknowledging that I'm an idiot. I'm really good at acknowledging that I don't know everything and I probably don't know a whole lot. Everybody thinks because I've done a whole lot that I must be really smart or really good at stuff. And no. I'm really good at finding and surrounding myself with people who are a lot smarter than I am. And and that makes me look good, I guess.
And so what I would suggest to anybody out there is, don't be scared to acknowledge that you don't know everything. Don't be scared to acknowledge that you're not good at things. Because if you think you're good at everything, well, then you're probably going to well— hubris is going to come in and destroy you, but also you're not going to do things the right way. You're going to try and do everything yourself because you think you know better than everybody else. Admit you don't know stuff. Bring in people that do and trust them to do it.
In terms of what I'm great at, what I found is I'm really good behind the computer. I'm really good at underwriting. I'm really good at the numbers. A lot of the fundraising stuff is really— and we can talk about this separately maybe in the next episode, but the fundraising is really, it's this idea of being able to build a funnel and attract people to potentially want to invest with you. That's number one. So we talk, I talk about, like at the top of the funnel is brand. You want a really strong brand so that people know who you are and get in touch with you and add their name to your mailing list and basically say, “Hey, I want to find out more about this guy and hear what he has to say.” The bottom of the funnel is trust. That's where people say, “Oh, I'm willing to give this guy $50 or $100 or $200,000.”
And the name of the game when it comes to to raising money is one, to be able to build the brand so that you can get as many people in that funnel as possible. Number two, build that trust so you can get as many people converted from in the funnel to actually investing with you. But the hard part is that middle part, which is getting people from joining your mailing list to saying, “I'm willing to invest $100,000 with this guy.” And what do you do to basically build trust with somebody that you're never going to see? You might talk to them over the phone, you might do a Zoom call with them, you might send them newsletters every week. But it's really, it's an art and a science to be able to get from “they join my newsletter” to they're willing to hand me a bunch of money when they're probably never going to meet me in person.
But that's what I'm good at. That's one of the things that I'm really good at, which is building that trust and converting people and getting them to be willing to invest with me. And that's what any good fundraiser does. And that's why that's the part of the business I focus on.
Awesome advice. Yeah, I think a little self-awareness, maybe a little humility can go a long way, right? Brendan and I, we both got some some clients and good clients, but, you know, I think there's a lot of of people out there in real estate that never want to let their guard down. They want to have an answer to everything and be the the ultimate wizard. And it'll come back to bite them or already has [at] some time. So I think that's excellent advice.
J, we appreciate you joining us. I think we'll we'll wrap this current episode around the borrower focus. And again, really appreciate everything you've done for us so far and will continue to do. And I think there's a lot of tangible takeaways, David, for a lot of our listeners that are tuning in, both on the investor and the borrower side before we officially sign off.
J, Where can people find a little bit more about you at some some recent publications? Anything you want to direct them to?
Yeah, if you go to ConnectWithJScott.com that's my LinkTree — it'll kind of link you out to everything you might need to find, including my email address, my website, and anything else you might be interested in.
All right. Well, J, looking forward to session two here. Let's let's wrap this, get a drink, and head back here.
This podcast is brought to you by your friends at Fund That Flip and produced by Connversa. So Fund That Flip is here for real estate investors all over the U.S. We are the premier hard money lender connecting active investors to passive ones through crowdfunded loans in order to make real estate investing accessible to everyone. We believe that by providing transparency into our process, as well as research and resources for investors at every stage, we can open up the world of REI to people and help small businesses everywhere transform their communities and make an impact on their neighborhoods. Learn more at FundThatFlip.com. Make sure to read us and subscribe wherever you listen to podcasts and find us on Instagram, Twitter, TikTok, and YouTube.
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