EP #14 - Common Mistakes New Real Estate Investors Make

In this episode of the Financial Freedom Fighters podcast, hosts Mike Magno and Jacob Sandoval delve into a range of crucial topics for aspiring real estate investors. From the significance of setting clear investment criteria and sticking to a strategy to the pitfalls of thinking too small, they offer valuable insights drawn from their own experiences. Through candid discussions about mistakes, successes, and the importance of continuous learning and adaptation, listeners are equipped with practical advice and inspiration to navigate the dynamic world of real estate investing and pursue their financial goals with confidence.

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Transcript

Nancy: 0:00

This is the Financial Freedom Fighters Podcast

Jacob: 0:13

Welcome everybody to the financial freedom fighters podcast back with another episode today. I'm your host, Jacob. I have with me, my cohost, Mike Magno. What's going on, Mike? How you doing?

Mike: 0:26

Jacob, what's up, brother? I'm doing great. It is, uh, you know, it's a cloudy kind of misty kind of crazy day here in Cleveland. Um, however, one quick shout out, not that she'll ever listen to this episode, but Peyton, my stepdaughter. Uh, who did our artwork, our cover artwork for the podcast. Today is her 16th birthday.

Jacob: 0:48

The sweet 16.

Mike: 0:49

16. So we've got a little party, uh, set up for her this weekend on Sunday. And one of her friends also has today as their birthday. And she's actually on her way to their party, their birthday party. So, shout out to Peyton. Love you kid. Um, and you're welcome. I let you skip school today.

Jacob: 1:08

Wow.

Mike: 1:09

That was her birthday gift. Let her skip school today.

Jacob: 1:12

Happy sweet 16 to Peyton. What a awesome gift from our wonderful co host Mike. Skip school. That's huge. That's

Mike: 1:21

Alright? I can't, I can't believe I'm, uh, cause I'm usually, uh, you know, I'm a ball, I'm a ball breaker. I can't believe I let her skip school, but

Jacob: 1:28

You're, you're, you're going soft on us, Mike. You're going soft on us.

Mike: 1:32

I'm getting soft.

Jacob: 1:33

Cool. My dog's going crazy in the background, but you know, we're just gonna keep forging ahead. We're just gonna keep forging ahead.

Mike: 1:40

hey, we're regular guys, right? Like, I mean, Felix the Pity, he's back here on his bed in my office, so.

Jacob: 1:47

There you go. There you

Mike: 1:48

But he doesn't make a sound. That, that dog never makes a sound, so.

Jacob: 1:51

So, something you didn't know about your Our financial freedom fighters hosts is, uh, we are big dog lovers.

Mike: 1:57

what are we talking about today? Jacob, what are we talking about?

Jacob: 1:59

a bunch of common mistakes that new investors make. So Mike and I felt that this was a very important topic because in my investing career, Mike's investing career, we've made a ton of mistakes. We've made a ton of mistakes and there's a lot of learning to be had within those mistakes. Uh, mistakes are often the best teachers in so many instances, you know, what Mike and I want to do today is. Kind of go through what these mistakes are and really trying to share our own stories in hopes that we can prevent you from making the same mistakes, right? If we've made them, hopefully you don't have to make them. that's, I think, you know, the most valuable thing we can do today is to kind of just share our knowledge, share our, a little bit of our pain. so Mike, before we kind of jump into the episodes, what do you think about this topic?

Mike: 2:48

No, I think it's a great topic. Um, I feel like these are reasons why people sit on the fence. They sit on the sidelines. and I've said it multiple times on this, on the, on this. Format before and I'll say it multiple times. I'm sure in the future. There's no better teacher than doing and you can skip a lot of the, the, the grief and the heartache by listening to us talk about our mistakes, but mistakes are part of the game and you have to understand that mistakes are going to happen. you can try to plan for everything, but if you try to plan for everything, you're going to look at it and go, Oh my gosh, I can't do this.

Jacob: 3:24

Absolutely. So know that mistakes are going to happen. They're part of the game, but to the extent that you can familiar familiarize yourself with the mistakes that other investors have made, like Mike and I are about to share with you today, maybe you don't repeat that exact mistake, And you kind of avoid those and there is real money to be saved. In not making these mistakes that Mike and I are about to share with you today. So we'll kind of roll into the first one. I'll kick us off, Mike. And you know, I think we'll both kind of just go back and forth with some of these, but the first one I have listed here is not running your numbers properly. Mike drilled this into my head when we first started investing together, which was, this is a numbers game. Everything about real estate is a numbers game and it's, To be quite honest, pretty simple math. If you can add, subtract, do a little bit of multiplication, you can do real estate math, right? It's not very complicated, but you have to stick to the numbers. I'll give an example. The first property that I ever bought, which was supposed to be A primary residence. It was in Portland, Oregon. Uh, we bought that house for 555, 000, which seemed like a steal. Um, because we were living in California at the time and everything was, you know, 1. 2 million or higher in terms of the houses we were looking at. So we were just like, Oh, this is a great deal. We ended up turning that into an investment property and the rent that we could get for that investment property at that time was 2, 800, right? 2, 800. Knowing what I know now, now that was enough to cover the principal interest taxes insurance because the interest rates were so low at that time. And so I was like, this is great. This is great. And that's actually what hooked me on a real estate investing. But knowing what I know now, that's not a very good deal in terms of the numbers, The 1 percent rule. I spent 555, 000 on that house and I'm only getting half of that in, in rent effectively when I should be getting a lot more now, if I had taken that same property value and purchase the property in Cleveland, Ohio, for example, we're probably talking multi multi units. Um, and getting the 1 percent rule all day. And so that's just an example of, you know, understand that the numbers that you're running, understand what the ROI is going to be and know what that, what those numbers are. I have a rental property calculator. That's free that, that that's available to you. There's a ton of calculators out there. No, what are the inputs? No. What are the formulas know how to calculate cash on cash return. And that's kind of the angle that I'm taking. I know you're going to take it in a different direction, Mike, but. Understand what the numbers are to just understand if the property is going to cashflow period and, and stick to those numbers. But Mike, I know you have things to say about this one as well.

Mike: 6:03

yeah, no, you made awesome points about, uh, your first experience with the, with the Portland property and, you know, the differences between the different types of markets that we're, that we're in, in the country. And the biggest thing would not run in the numbers is just understanding that, you know. Those mistakes will happen and hopefully you don't get burned by them. And in your instance, there was other circumstances cause you guys were actually going to physically move there. So you did a lower down payment. So then your PITI was higher. So then your cashflow was obviously lower. But, um, for me, one of the things I wanted to talk about on this topic today was, um, you know, underestimating expenses, right? This is a common mistake people make. And In my investing career, the, the mistake has been in the rehab side of things. Right. Um, I've never got, I've never gotten one. Right. So I'm going to share, I'm going to share a quick story, uh, so that people, you know, people know, like, you know, we're human. Right. Um, I think it was our third flip my dad and I did together and he goes. You know, are you ever going to fucking get these numbers right? Cause I was like 13, 000 over budget for, for the rehab.

Jacob: 7:22

That's hilarious.

Mike: 7:23

And that, I mean, when you're over budget on a rehab, where's it come out of? It comes out of your profit. Right? Um, now I can honestly sit here and say. I've never lost money on a rehab. Have I had rehabs that didn't make nearly as much money as I would have hoped? Sure. I can sit here and I can say that for one reason or another, either the rehab took too long or the rehab went over budget or I missed something like we make mistakes as investors. Right. Um, great example of a mistake was on one of our rehabs from 2023. Um, I bought the house into winter. And the driveway, when I bought the house, when I walked the house, the driveway was completely covered in snow and ice and everything else. And wouldn't you know it when I, when the house, when, when spring rolled around and everything thawed out, that driveway was wrecked, was wrecked. And when you're doing a rehab project, right. And you roll up in, in the perspective, buyers are going to roll up to that property and they would have saw a wrecked driveway. Like it was a concrete driveway and it was just, it was, it was a disaster. There were, it was cracked and in the back by the garage, it was, it was raised like six inches. So it was a mess. It was a mess. So I had to bite the bullet, right? I was one of those, you know, uncomfortable phone call. Cause my dad was my partner on that one as well. When I had to call him and say, Hey. Um, we really got to replace this driveway, you know, and anyone who's gotten a concrete driveway replaced recently knows that that's not a cheap, uh, So, uh, but we got it done, you know, we got it done and yes, it took, it took six or 7, 000 out of our budget, um, over our budget rather on that one. But, you know,

Jacob: 9:12

with that being the case, Mike, that you have never accurately kind of landed this budget. How do you take that and account for it now? Do you have the, Oh crap, kind of. Line item in your estimate expenses.

Mike: 9:26

yeah, so I, I target a certain return on, on the flips and there's enough margin to where if you make a mistake, You're not going to be upside down. That's how I do it. And it's funny you you have that great calculator that you've built I literally analyze properties on a notebook on a piece of paper when I'm doing a rehab I just I visualize it much better that way. I'm just one of those weird. So like I literally do my analysis This is terrible I'm gonna admit this but a lot of back of the it's basically back of the napkin right and 70 percent rule Uh, for pretty much everything.

Jacob: 10:07

Let's break that down for the listeners.

Mike: 10:09

Yeah. So the 70 percent rule is when you're doing a, when you're doing a flip, uh, 70 percent of the purchase price, less the rehab, right? So you're baking in a 30 percent margin. You're baking in a 30 percent margin. And if you hit all your numbers and you get that 30 percent margin, Well, you're not going to really get that because you also have expenses. You're going to have sales expenses on the other side, which are typically five to 8%. So your margin then becomes 22 to 25%. Um, that's a good margin, you know, because on 100, 000, right, that's a 25, 000 return. And if you do it in six months, it's really a 50 percent return on your money. So that's where it gets, it's the, it's the way you, you frame it and think about it. So what I do is I take the AR, you know, I take the ARV and as an agent, I calculate the ARV pretty quickly. Um, I've been doing it so much. Like you can just kind of give me an address and the square footage and the layout of the house. And I can already know in my mind. What that ARV should be, but I'll do, I'll dig deeper. If I like the deal, I'll dig deeper and I'll run an analysis through the MLS and I'll pull comps and I'll compare them and contrast them. And then I'll come up with an ARV and I typically come up with, come up with a range, I'll come up with a low range and a high range, and then I typically will build my Personal numbers off of the lower end of the range because I want to, I want some safeguards and guardrails and then I'll take the 70%. Right? So boom, let's just in this example say, uh, for math purposes, 100, 000 ARV automatically we're down to 70, 000. And if the rehab I'm estimating is going to be 30, 000, that means I got to buy the place for 40 for it to be a profitable flip. Now, mind you, I'm also paying with. you know, in this, in that type of deal, I'd be paying cash. So I don't have a ton of holding costs. So. Those ratios need to be different for different people for different acquisition strategies. Cause if you're using hard money, well then, you know, hot damn, you know, you're going to need to bake in some more costs. You might need to use 65 percent of the ARV or 60 percent of the ARV minus the rehab because you've got, um, some holding costs and things like that. So

Jacob: 12:23

on the topic of not, not running your numbers, I'll kind of give just like another quick example here. When I bought my first property in Cleveland, Ohio, it was a duplex on the West side that Mike helped me find, obviously. And I was running my numbers on there. I thought I was doing everything right. You know, like I had my calculator, I was kind of running those numbers. And I ended up, we ended up getting that property under contract and I secured that deal. But when I was kind of revalidating some of my assumptions with Mike, he let me know that, Hey, you know, the water bill, that's the responsibility of the landlord. And the reason why that was is because this is a duplex. So it's a two unit property, but the water was not separately metered. And if the water is not separately metered and you can't really. Legally split the usage out so you can't build that back to the tenant. That is the responsibility of the landlord. And that was margin, you know, profitability cashflow in the deal that I thought was just going to go straight to my pocket. And so I. Share this with you to say, make sure you understand the utility situation when you're buying a rental property for single family houses doesn't apply because single family houses only has one tenant only has one set of utilities. Everything can be basically attributed back to the usage of that tenant. So that's also just highlighting maybe some of the strengths of single family versus multifamily. In that the utilities are just more clean, but maybe you're going to get a lot more rent on the multifamily versus a single family. And, but I just didn't know that. And Mike, so Mike educated me on that and that's a little bit of cashflow that I'm giving up, but it's learnings that I, that I have going forward, knowing that to kind of bake that into the, the deals going forward. we'll kind of like move on to the next topic here. I think we run your numbers, you know, whether that be for an investment property or for a flip. And kind of double, triple check those things and make sure you understand what are the expenses that you're looking at and make sure you're not forgetting any, right? Because that can change the dynamics and the returns of your deal. So we'll kind of move on to the next one, which is not doing proper due diligence and research. And so I'll kind of kick this off by saying, well, what is due diligence, right? Maybe you didn't listen to our past episodes and that's totally fine. So we can kind of go into that today. Due diligence is the period in the acquisition process where you have an offer under contract and you are going to, you know, take a closer look at that property, both from like a kind of a physical inspection standpoint, and then also making sure that. All of your ducks are in a row with your research in terms of, you know, your underwriting and your market research and your neighborhood research. And so that's just the due diligence process as a whole, but we'll kind of zero in on the actual due diligence and the actual inspection of the property. So. You're going to be working with an investor friendly agent. That agent is going to link you up and schedule all of the relevant inspection inspections for the home. Um, and Mike, we'll go into more detail on that, but this is your opportunity to really understand what is wrong with the property, if anything, right. Or what are the things to know? I think the biggest thing is like, as a new investor, you're going to get that home inspection report, Mike, and it's going to. Freak you out. It's going to be a hundred pages. There's going to be a million things that are, that seem like they're really serious and you're going to want to back out of that deal. Right? But the mistake there's, there's a lot of mistakes to be had here, right? The one mistake is just not doing the inspection, which I, if you have a good agent, that's not going to be an option, right? They're going to make you inspect the property, but in a competitive environment, people would forego their inspection contingency. Which is a massive, massive mistake, especially with an older property. You don't know what you're walking into. There are instances where maybe that's fine, right, Mike? I mean, you have done that because you know what you're getting yourself into, or maybe it's a brand new build or whatever. I don't know, but don't do that. Don't do that. And then the second mistake is to overreact to what you're seeing in the inspection report itself. And Mike is going to kind of get into what are the things that you actually need to pay attention to. Um, so don't overreact. I think it's the second mistake because that that's my instinct as a new investor or was, and, you know, still is sometimes when I look at inspection reports, I'm like, that seems like a big deal. And Michael be like, that's not, it's not that big of a deal. So Mike, what do you think on this kind of due diligence piece?

Mike: 16:55

Yeah. So the, the, the inspections that you're gonna perform on a, on a property, you know, they are gonna be, they are basically a microscope in on which you're looking at the property, right? it's gonna be d it's gonna look daunting, right? That report comes through your email and a PDF and it's 55 pages, or it's 60 pages long, and it's got pictures and it's got red ink, and it's got, you know, so here's what, here's what I tell people. It's, you know, the home inspection is basically a report card of the property. Right. And they're going to be things that are going to be marginal. There are things that are going to be, you know, defective or there's going to be things that are like, Oh God, like this has to be done like right now, you know, and what, what could those things be? Um, Something that would be marginal. Um, you know, a handrail is missing going to a basement. Like that's, that happens a lot here. You walk into a property, there's no handrail. um, what's another thing that would be marginal? Um, a GFCI outlet in a basement, right? Because it's considered a wet location, uh, code would say that you're supposed to have a GFCI outlet, um, or garages or another one where we see a ton of outlets where they're not GFCI protected, right? That's such a little thing, you know, to, to like get your twisted up about. Um, and what I tell investors to, and you as well, Jacob, you know, um, you know, the, the, really the major things that we want to look at. From the inspection perspective, are your major systems, right? What are the major systems that we talk about in a, in a property? Those are the CapEx things, the capital expenditures that are going to cost you the most money. So for me, those items are, and they're not in any particular order of importance, but they're roof, windows, siding, right? So the basically the exterior shield of the property and then foundation and mechanical systems, right? So that would be furnace and or air conditioning, electrical and plumbing. Um, people might lump it, you know, a hot water tank in there, hot water tanks are cheap. They're going to break. They are what they are. They're really not a, in my opinion, CapEx, um, they're more of a, they're aware item. right? They wear out. They're like brake pads on a car. Um, and then the other thing that you're looking at is obviously cosmetic things in a property, right? If you're buying a property that has tenants in it that have been in there for eight years, well, it's a pretty good assumption that the carpets are worn out, right? They're, the, the walls are going to need painted, right? Um, I live in a house that was built in 2015. We we've been here since 2015. And I look around at some of the walls and I'm like, damn, that's pretty tired, right? They're marred up, they're, they're beat up, you know? So there are those things that you're gonna have to deal with at tenant turnover, things like that. But those are just, you know, those are very ancillary, but the really, the biggest, the biggest things that we want to make sure that we're doing good with is those major, major items.

Jacob: 20:02

Yeah, definitely. And just to kind of put more of a point on that, the Portland house, we bought that in a low interest rate environment, extremely, extremely competitive. And while we still did our inspection. There just wasn't a lot of flexibility to kind of go back to the sellers and try to negotiate anything based on what we found. And what we did find is that the sellers were selling this house at the exact time that all their major systems were at their useful life. So the roof needed to be replaced. The hot water tank was basically like too old. The furnace needed to be replaced. The, the fireplace wasn't working anymore. Like all their major systems needed to be replaced. And because we were in a competitive environment, we couldn't do anything about that. Now we did actually have some pretty good agents and they were actually able to negotiate, a new, hot water tank and some like repairs and things like that. So there were some things that we did, but effectively, right, the roof need to be replaced. And, and these are all things that we need to factor into. And so to Mike's point, you have to know what those are and you have to know what the costs associated are at the triplex that I had, we obviously did due diligence on that triplex, but, um, one of the furnaces does from 2010, uh, it just went out, it just went out and we tried to, you know, replace the circuit board and we tried to repair it, spent like 500, 600 bucks, repairing it, But then it went out again, and we had a couple guys take a look at it, and I think a furnace should have a longer useful life than just 2010, but This one was just fried, like, I don't think they did any sort of ongoing maintenance of it And I think that's what happened, but that was, you know And then the funny thing was my property manager, they said, yeah, we're going to need to replace this. It's going to be like 6, 500 or something, 7, 000. That was kind of the quote that they gave us. And I said, can we, uh, can we just like get a few more quotes? Because that seems like a lot. And they, we found one that was only 4, 500 for basically the same furnace. And I was like, I'm just so glad that I asked for multiple bids. I was going to pay like 6, 500. And that was just the first quote that they got because that property management company has a relationship. I'm sure with this like first vendor. Um, but I saved just like 2000 bucks just because I asked, to look at other things, but in general, those are instances where, you know, it's, it's not very fun to have those surprise expenses. So could like, we didn't find it, like it was still working when we did the inspection of that, the furnace, but could I have maybe taken a closer, like look at it maybe, but I, you know, it seemed fine.

Mike: 22:44

Yeah, no, that's, that's an extreme case. A 2010 furnace should not take a dump on, you know, for that shouldn't happen now to Jacob's point, you know, did the previous owner. Not do proper maintenance. That's a pretty good possibility that he did not have it serviced annually Furnaces should be serviced annually. They get a lot of dust and dirt and buildup in there Especially if the tenants aren't, you know diligent about changing out the filters and stuff So, I mean they should be serviced annually, you know It's it's good peace of mind for a hundred bucks four hundred and twenty five bucks to get your your furnaces serviced every year You know and they should last twenty five thirty years They should,

Jacob: 23:32

Yep. Yep. So, well, I have a rebranded furnace now is what it is comes with the game, but again, mistakes, right. And I don't necessarily know that that was my mistake, but for you, the listener to just be aware, like Mike is saying, be aware of these kinds of big ticket items and be aware of the condition of them. So when you're going through the inspection report. Maybe your inspector did kind of flag that this is like a funky looking furnace and it's working fine. But, you know, maybe, maybe you do double click into that information and while you're in the due diligence, you say, you say to your realtor, like, Hey, I'm kind of suspect on this furnace and maybe they'll tell you, Hey, I think it's fine. Or you can actually get a second opinion, you know, on the furnace specifically, and that maybe that will give you some peace of mind.

Mike: 24:09

that happens a lot too. Like we'll, we'll do an inspection on a property and a furnace will be, you know, short cycling or it won't, it won't be running properly. Um, I can think of an instance on a deal that I did last year on a furnace that was like 2019 and it wasn't running right at the inspection and it was a simple fix, but that was, we, we still required the seller To have it fixed, like it's a 2019 furnace on a deal in 2023, there definitely shouldn't be anything wrong with a four year old furnace. So, you know, part of our, um, part of our, uh, removal of contingencies, we said, Hey, we want a reputable HVAC company to come, you know, assess this furnace, provide You know, provide to us what it needs and then make the fix. And it was a, you know, like a flame sensor needed to be replaced or something. You know, it was a hundred dollars. It was a hundred dollar part, but because the seller hadn't had it cleaned in four years that it had been there, the part went bad,

Jacob: 25:16

yeah, for sure. And then the other one that I see a lot of new investors. So I talked to a lot of first time investors, people that are hoping to, or, you know, doing their first deal. Right. I talked to a lot of people that they're, they've been researching real estate. They've been learning and they're kind of jumping in doing their first deal. And whenever they tell me that they got under contract and they're doing inspections, I always ask the same thing. I'm like, did you get, are you getting the sewer, the sewer scopes? Um, because it's one thing that is like often over overlooked by a lot of first time investors. And so that's one thing I'll add is to just ask your agent, Hey, I want to get the sewer scoped. And the severity of that is probably going to depend on the age of the property, but that's just like another factor that people, a lot of people don't consider older properties have clay or cast iron kind of sewer pipes and those degrade over time. And there's a lot of reasons for that, but they just get old. But if you have a property that's built probably after the 1980s, you have PVC, uh, sewer pipes, which lasts forever. Um, not forever, but you know what I mean? They last a long time, but that's just one of the items that don't forget to do that because that could be a massive, massive headache for you down the road if, if, if, if it's not working properly. So that's one additional one that I'll highlight. And this probably all seems like a lot, but I also have put together, you know, in addition to the rental property calculator, I put together kind of a property inspection checklist, not necessarily like a checklist, but just highlighting all the major items Mike and I talked about, because for the new investor, it's easy to freak out. So think about this as like the translator for a home inspection report to say like, okay, let's focus on these big systems. Obviously still get the inspection report, but these are the items you kind of want to double down on. And so you can get that on my website. That's helpful at all to you, Mike. I'll keep us rolling here. so the next one that I want to talk about is the mistake of not starting early enough. So this is a little bit of a different one, but I think it's one that probably any body that's investing in real estate feels that they've made. Um, I know you and I were just talking about it, Mike, you know, and I feel that way as well. If I had invested in real estate, even just five years ago, right. Even just five years ago, the amount of growth that's been happening in the real estate industry over the past five years in pretty much any market, um, it's pretty phenomenal, right? This is real. It's been on an amazing, amazing run. Um, and there's a lot of kind of macro economic factors that have been driving that. I still feel like those macro economic factors exist. Those tailwinds still exist for the real estate industry. But if I was investing five years ago. I would probably be fairly close to achieving financial freedom already, just based on like the growth that real estate has seen in that time. Now the proverb says, uh, the best time to plant a tree was 20 years ago. And the second best time to plant a tree is now. And so all this to say, don't make the mistake of thinking that I, yeah, I'll, I'll get to it. I'll get to it later. I'll get to it later. I'll, I'll invest in real estate. You don't know how many people I've talked to that says, I always said I was going to do it. And I just never did. And then they're in their kind of mid to late forties. And there's like, if I just started investing at your age, I hear that often. And even myself, I feel, you know, I could have gotten started earlier, but don't make the mistake of thinking that it's too late that, you know, you're just going to get to it eventually. Cause you're not, you're not going to get to it eventually. Right. Like you, you have to make the time for it. But what do you have to say about this one? Mike, not, not getting started early enough.

Mike: 28:50

I mean, you, you hit the nail right on the head with the, you know, the, the best time to start investing in real estate was yesterday. The next best time to start is today. Um, you know, I got a super late start to, I got, you know, I, you know, I've told my story many times about, you know, getting started in real estate at the age of 37 and didn't really start investing in real estate until, you know, I was in my forties and even just in the last three years, the amount of growth I've seen in, in myself and my business and my wealth, um, has been phenomenal. You know, profound, profound is the, is the best way for me to, to describe it. So, you know, and for, you know, and we, you know, I, we have a very, you know, uh, instant gratification kind of society. And I think that's another way people struggle with it is if they can't have it now, if I can't have that 5, 000 a month in cashflow now, then I just won't do it. And it's like, no, you just need to, you know, you need to start, you know, you need to start going and getting after it, you know, not to, not to throw another cliche out there, but, you know, uh, I don't know if it's an Abe Lincoln or something. I can't remember exactly, but you know, when you're chopping down a tree, right? How many you spent, you know, it might take you five hours to chop down a tree. Well, you spend the first four hours sharpening the ax, right? And then you, you dig in, so, um, you know, for me, you know, just taking more swings at it and getting more involved and doing more deals and you learn and, you know, you, you learn from people like us who have done it and we've made those mistakes and they're not going to make those mistakes, right? They're not going to make the mistake of not, um, adding in the water and sewer bill into their, into their due diligence now and, um, you know, get you just get your rolling. Cause you just need to, you just need to start rolling down the hill and then the snowball gets a little bit bigger and it can be a little bigger and a little bit bigger, you know, even myself, you know, we're, you know, um, our investments, you know, our small and mighty portfolio right now. I mean, it throws off, um, you know, it's not gigantic numbers, but it's a couple thousand dollars a month in cashflow, you know, cause we've got leverage and stuff, but

Jacob: 31:10

this kind of ties to another one too, which is the fact that like you touched on this, Mike, but people want this instant gratification, right? They don't have the patience. And I'll be very, very clear with this. One property is not going to change your life overnight, right? It's just not, this is a get rich slow game. You need to have patience with real estate. you have one property starts to cash for a little bit. And then you run into some issues, maybe the furnace goes out. And then some people are like, ah, this real estate stuff just doesn't work. You know, just doesn't work. And so you, what, you sell that property and then you just get out of the game. And you didn't give real estate enough time. You didn't have, you know, the cash flow grow, the appreciation compounding. You didn't get that second deal that's going to be better than the first or the third that's going to be better than the first two. You didn't see that all of the kind of like. Benefits of having a portfolio and, and those little things that start to kind of unlock themselves when you start to kind of grow in this real estate investing game, you didn't see that like after year five, maybe you have a couple of properties that are appreciated more than you thought. And you could like sell those and roll them into a much bigger property, right? You don't see that the flexibility that these things start to kind of unveil themselves as you've been doing this a little bit longer. So do not make the mistake of one thinking that it's too late to get started. And then two. not having the patience to see it through or the fortitude to see it through. I was talking to, you know, an investor I met, um, out of real estate meetup here locally in the Bay area. I think he also listens to the podcast. Shout out to Mateo. He's, I believe in his early twenties and he is very determined to get his first deal that that guy is going to be. I'm a multimillionaire before he's 30, I'm, I'm convinced of it because of him taking action right now, him being like thinking, having this mindset, um, already at such an early age. And I can't wait to see what that, what that kid does, because, you know, I don't know that many kids in their early twenties just thinking about real estate. So, you know, shout out Mateo and shout out to everyone that wants to get started in this game. And just know that you're going to have to have some patience in this game, but I'll roll us to the next one, Mike. And it's thinking that you can do it alone, thinking you can do it alone. And so there's a lot of different ways to kind of take this one, but real estate is a team sport. It is a team sport at the minimum. You're going to need an amazing investor friendly agent like Mike. At a minimum, you're going to need to have an amazing lender. That's going to be able to kind of walk you through the transaction and counsel you through the whole process. Like Steve Wiley, who we had on the podcast, um, last at a minimum, you're going to need an amazing property manager. That's going to be managing the day to day. And if you think you can do real estate investing at a high level without any of those team members, those core team members. You're going to be sorely mistaken. You're going to be sorely mistaken. I do not know a fraction of what Mike knows about Cleveland real estate. I, there's no way I could, there's no way I could, but I don't need to because I might, you know, I don't know the ins and outs of lending requirements and things like that, but I don't have to because I have Steve, right? And I trust that my properties are being taken care of by my property managers. And so I don't have to be an expert in property management. Now, the one thing I'll say is, There might be times where you're tempted to self manage and Mike, I know you self manage is a little bit different though. You're, you're kind of in this game and you're local and you're local, right? So you can do it, but maybe that's also not going to be the best use of your time at some point to Mike, we've talked about that as well. Um, and so, but for investors that are like me who are out of state investors, don't think that, or don't even attempt to self manage. Maybe even if you live locally in that market, like maybe that's just not the right move because that's gonna. Take you away from what the, the real game you're playing, which is the investing game. You're not trying to get into the property management game. Like, unless you're trying to start a property management company. The other kind of direction I'll take this one in is you got to have a network. In terms of other investors, you gotta have a network of people that are actively in your real estate business, helping you out like Mike and I have just talked about, but you also have to have somewhat of a support system, um, with other investors kind of in your area. Uh, so I have for kind of the past year, I've been really, um, getting a lot of value by going to these real estate meetups, uh, kind of locally in the Bay area and just learning from other investors and learning the mistakes that they've made. Um, learning about their investing strategies and their markets and things like that, and sharing knowledge. Um, so one thing that I really like about the real estate community is everyone is pretty open to sharing, um, their journey and what they've learned and the shortcomings and the mistakes just like Mike and I are doing here. So don't go it alone in a sense. Don't be in a silo, just investing and, you know, reading books and kind of like staying in a cave, so to speak. That's, that's what I did for the first part of my investing. You know, I was just. Passively listening to, uh, bigger pockets and reading books, but I didn't have anybody that I knew actually, that was doing the same thing or attempting to do the same thing that I did. So that's another thing, you know, to find yourself a network of people that are investors, you know, follow Mike and I. Um, if you want to shoot us a message, but that's another aspect of it. Don't go it alone. Um, so I'll move us to the next one, Mike, one, I'm going to, I'm going to, this is kind of a big one, but one I'm calling it, not just not having a strategy in general, right? Not having a strategy in general. And then if you do have a strategy, actually not sticking to that strategy. So, So what do we mean by strategy? There's so many different ways to approach real estate investing, You have the type of property that you're trying to go after. Are you trying to go single family, multifamily? Um, are you doing residential commercial? Um, there's so many different aspects to what market do you want to pick? Are you indexing on a cashflow market or an appreciation market? Are you going multiple markets or are you like really going deep into one market, right? Like what are you doing there? And then just all other aspects to your specific buy box or your specific property selection criteria. Are you looking at blue collar C, C plus neighborhoods and that's kind of where you want to be because there's a little bit higher cash flow there. Or are you actually doing a complete different strategy where you're getting in the best school districts and you're getting really nice single family houses and hoping to rent to families that want to be in that kind of like high school district, you know, for a long time. these are all different decisions that you can make. But. These are all pieces of your strategy. How long are you going to do this for? How long are you committing yourself to doing this for? Are you buying one property year every year for the next 10 years? Or are you buying one property and then the next year trying to like scale that up and each property is getting bigger and bigger and bigger like What is the plan? What is the vision? What is the strategy? I see a lot of investors just buying just to buy, They're buying in one market, they're buying in another market, they're buying a single family, they're buying multi family, they're thinking about doing a flip, they're thinking about doing commercial. Um, they're all over the place, right? And there's no clarity of strategy. But anyway, all this to say, and I'll pass it on to you, Mike is you got to have a strategy, and you gotta have that clarity. Because if you don't have that, you're just going to be spraying and praying, you know, and you don't want to, you don't want to do that. So what do you have to say about that, Mike? Yeah.

Mike: 38:51

points that you made. Uh, I see this a lot, you know, cause I get, um, you know, I get a lot of people who reach out. You know, to us and I'll do a consult with them and they'll be like, yeah, I want to do section eight. Um, I want to do short term rentals. Um, I want to burr, uh, and maybe I'll have some land for development too while I'm at it. And it's like, whoa. You don't, how many properties do you own? Well, none. Okay. So let's, let's, let's take a, let's take a step back. Right. Um, I, I get personally the way I kind of frame it with people is, you know, what's the risk tolerance, right? You got to kind of start there. How much, and how much capital do you have is important. How much capital are you willing to, you know, put into a deal and risk? Uh, and then what's the ultimate goal? Right. Like we've talked about it before on, on previous episodes where, you know, what's the ultimate goal? Cause we can reverse engineer it. So that's how I kind of tell it with people and I try to get them to narrow the focus. There's, there's too much of the, uh, in, in our industry as a real estate agent, we call it the squirrel syndrome, right? Like, um, agents are. Are notorious for this. Like what's the next shiny object? Uh, especially when it comes to like lead generation stuff or, you know, paid, you know, pay paying for leads, you know, a bunch of these facebook groups and there's people like Hey, what do you think of this? And what do you think of this? And what do you think of this? And I want to pay for that and pay for this. And it's like, no, come on, just, you know, I tell people all the time, like you don't need to spend a bunch of money. You just have to have conversations, you know, on the agent side of the business, um, you know, what, what we teach is you need to have 10 to 15 real estate conversations a day. 10 to 15 real estate conversations a day, and you can help build real estate, your real estate business as an agent. Um, and then with the, the strategy thing, why this is important is, you know, my personal thing, right? I buy properties, you know, especially the rehab stuff that we do. I'm not looking to build mansions here. There's guys who do that at a very high level here. It ain't for me. I'm buying 1500 square foot or less properties so I can get in and I can get out and I can control my costs and I can control the project and I can control all of those variables. So yeah, I'm not taking huge risks, so I'm not going to make huge returns, but I'm consistently making a good return. Because I've narrowed my buy box down to, you know, what I buy and we talked about it on the, well, a few episodes ago, uh, when we were talking, Oh, when we were talking about flipping, right? Uh, and I mentioned, uh, we talked about that one property that I've owned that I've actually ended up turning it into a burr, but that property started as a whole tail. Then it turned into. A rehab, it was going to be a flip and because I didn't sell it, it ultimately turned into a burr. So I even, I even fell into my own trap. And why do I bring this up? Because I didn't stick to my strategy. I bought outside my zone. It's only one block outside of the zone that I buy. Literally the zone one. It's one block north of where I normally have a line driven drip on the map where I won't buy outside of that box and I bought outside of that box and now look now, don't get me wrong at the end of that. At the end of this long arduous process for me. I'm still gonna make money. I had multiple exit strategies for that property. I bought it good enough. I have enough team members in place to where I was able to control my costs and I'm still gonna make a decent return on that property, right? As a matter of fact, and I, I don't, I don't want to do it to brag, but it's going to be an infinite return. Because that property we refinanced out every nickel out of that property.

Jacob: 43:03

It's amazing.

Mike: 43:04

So now it's also taken me like 18 months. You know, I've owned that property since July of 2022. It's January 26th of 2024. Um, so it's, you know, so that's why it's so important to, you know, stick to that, stick to your strategy, stick to your buy box, formulate it and enroll. I'm, I'm still learning, right? I mean, I'm still learning. I may. Hey, that's why we're doing this. We want to share our wins, but we also want to share our mistakes.

Jacob: 43:34

You either win or you learn, Mike. You either win or you learn. And I'm glad that we had a happy ending to that BRRRR and that you're able to get all of your money out. Um, and I'm, I'm glad I had a happy ending, glad I had a happy ending.

Mike: 43:49

man, that was a, that was a doozy of a one. Trust me,

Jacob: 43:52

Yeah, for sure. So folks have a buy box, have a strategy, do the work upfront to know what that is before you jump into the real estate investing game and don't build your strategy as you're kind of going along. Because if you don't do that and say, you know, you just start buying, you buy something in Cleveland, you buy something in Kansas city, Missouri, could just end up with like this, you Frankenstein zombie portfolio and you just didn't know What you were doing, and then you have to kind of peel the layers back and figure out then what you're doing. So just do the work up front and you'll be able to move a lot faster. You'll be able to, you'll be able to say no to a lot more things, which I think is just massively key in the real estate investing space is being able to say no, because there's a lot of things that could seem like good ideas and maybe they in fact are, but if you don't say no to enough things. You're just not going to really good at finding those things that you do want, right? And so if you don't know what you're looking for your buy box, you're never going to find it, right? So do do the work to identify what you're looking for. So i'll roll this on uh to the next one mike We're coming up on time But this one is Not continuing to learn And adapt, we've kind of touched on this one already, but the real estate investing game is constantly, constantly shifting. not only are the strategies changing, but the dynamics of different markets are changing. Um, the kind of macro economic conditions that impact the real estate industry are changing. Um, just the norms, you know, I, I, the other day I was listening to a podcast and they were talking about that. We're not that far away from 40 year mortgages being a thing. And as an investor, you're like, okay, you hear that. And there's a lot of different ways to think about a 40 year mortgage. One, you're paying a lot more money to the bank, but two, that's going to reduce the amount of cashflow. I mean, improve the amount of cashflow because you're, you're reducing, you're basically, you're increasing the length of time you're paying back that loan, which in the short term is going to help your cashflow, but you're also paying much more to the bank over that time period. But I I'm sure there was a time period where 30 year mortgages seem crazy. Right. Um, And so that's, those are things that you just have to be aware of is like, is there a way as an investor I can actually take advantage of that? Or is that a bad play? Right? But if you're not staying in the know about the real estate industry, if you're not staying up to date on what's happening and what's shifting, then you could just be getting dated with how you're kind of approaching the real estate investing game. You know, like, are you thinking about different ways that you could be approaching the market a little bit differently? Like, are there, you have to stay on top of your game. And so I think what that looks like is listening to podcasts like ours, other different real estate investing podcasts, taking some online courses, reading books, watching YouTube videos, talking to investors, talking to people, actually doing deals. And just continuing to learn, because at the end of the day, it is a long term game and it is going to, we're going to go through many cycles. If you're going to be a real estate investor for the long term and you got to stay on top of it.

Mike: 46:56

you have to stay, uh, stay, stay loose, stay fluid, stay adaptable. You know, even myself, I've, you know, I've come across things and I, you know, struggle with and, but you, you continue to learn and, you know, where I ultimately want to get is not where I'm at today. And, um, as people, you know, learn and grow, you know, they continue to. You know, look, look forward and move forward. And I think that's important, you know, especially, especially who you surround yourself with. So,

Jacob: 47:28

Yep. A hundred percent. So I'll round us out with this one. This is kind of more of a positive one. but it's the mistake of thinking too small. I forgot who said this, but we often overestimate what we can accomplish in one year. but underestimate what we can accomplish in 10. And so this is to say, I know, especially if you haven't done your first deal yet in real estate, this is all so very daunting, you know, and how, how could you conceivably build a portfolio that's going to deliver you financial freedom and generational wealth for, for you and your family? Like, how could you even like wrap your head around that when you haven't even done your first deal? And what I'll say is, You know, Mike and I, we haven't gotten there yet, right? We're still actively pursuing chasing that dream, but with every subsequent deal in every single year that we stay in this game, you know, our minds become more open to the possibilities of what we can achieve, right? I'm, I'm more motivated than ever. I know Mike is more motivated than ever to build that generational wealth. Portfolio that's gonna give us the optionality that we've, you know, craved our entire lives. That's gonna set our families and future generations up for success long after we're not here anymore. You know, and I think that I truly in my heart believe that I know Mike does as well. And that is not something that maybe we believed in the past, right? And it's probably something that you don't believe right now. Listening to this, yeah. But do not underestimate what putting in the work over a long, consistent period of time being passionate about what you do of being passionate and being willing to outwork a lot of people that don't have the patience, uh, that don't have the fortitude to stay in this game for the long term. Don't underestimate just staying in the game, you know, and being adaptable and, and, and never, never tapping out. And so. I feel like there's probably so many failed real estate investor dreams. just across the board, you know, and I feel like there's so many people that have tapped out of it and we don't want that to be you. We don't want that to be you. So don't think too small. Mike and I's favorite real estate investing book, the millionaire real estate investor by Gary Keller. that really opened my eyes to what was possible and the kind of main takeaways, it showed you how you can have a million dollars in cashflow. A portfolio that's generating a million dollars in cashflow and how that looks over time. And, you know, to be honest, that's, that's, that's what I'm shooting for. I want a portfolio that's delivering a million dollars in just pure cashflow. What a concept, but that is something to strive for. And it's possible. So Mike, what do you think about this one?

Mike: 50:10

I tell people all the time I'm at a, I'm at a place I never imagined I would be. And that's in six years, you know, I've told the story many times I got into this, I got into the industry, uh, wanting to replace my income from my, my previous career, you know, 60, 70, 000 a year or whatever. And it's amazing how quickly. Surpass that and have continued to escalate and continue to take on more and, and do more deals and build a business and, and, and, you know, building that life that I want, right. That we all want, and that's where, you know, you have to, you know, you just. You got a dream. I, I, I, it's something I struggle with mightily, mightily with, with the goal setting stuff and thinking about that and having a why and things like that, I, I struggle with that stuff mightily, you know, I, I think I'm a kind of a humble guy. I don't like to brag. I, you know, I just, I, I'm one of those guys. Like I just kind of let my thing do its thing. And you know, the way I keep scores with my bank account, right? Like I don't need the, um, the Instagram of vacation of everything, I guess. Uh, even though you're going to see being, you're going to see a lot more of me on there here soon because we,

Jacob: 51:29

Mike, Mike, hired a social media

Mike: 51:31

yeah, I hired a, I hired a social media manager. So I hired a very sharp up and coming guy, uh, to manage our social media and help us, uh, help us grow this podcast and help Diana and I grow our real estate business. And you know, we, uh, I have finally, I have finally kind of gotten off the schneid and agreed with Diana that we want to build the real estate business more than just the two of us. Um, we, you know, we want to build, uh, uh, build out the team a little bit. It's not gonna be a gigantic team. We're not gonna be some, um, some team of 30 or 40. Uh, but we could probably be a team of five or eight mighty agents. And, um, you know, I can help change, I can help change other people's lives too, in that regard. So that's, that's important to her and to I, um, so those are things that we're looking at. And, um, you know, it's, it's, it's wild to think it truly is, you know, we, uh, once again, I, I don't, you know, I'm not, I'm not one to gloat. Um, you may or may not have seen this week on social media. Um, something that popped up in 2022, Diana and I finished as the number seven duo at KW in the Michigan and Northern Ohio region. So Keller Williams is, is, is carved up into regions and our region is Michigan and the whole state of Michigan and Northern Ohio, and that comprises like 28 or 29 market centers. So. Um, physical Keller Williams market centers. so we kind of looked at, we were at the awards banquet in Toledo, uh, you know, in early 2023, when we finished seventh in 2022, and we kind of looked at each other and we're like, Hmm, you think we can be number one?

Jacob: 53:22

Yes, you can.

Mike: 53:23

Uh, yes we can. Right. So that was actually our number one, one of our number, one of our top goals for 2023. We wanted to be the number one duo in the region. And we were the number one duo for the first 10 months of the year. Every, every month the numbers came out. We were number one. We were number one. We were number one. We were number one. We got caught in November. We were number two, but the story has a happy ending. I grew. I was grinding in December grinding. I closed eight deals in December. And we caught that other team back and we took our rifle spot at number one and that just came out this week from the region. where I'm going out with that long story, and I apologize, everyone, uh, for that long story, and I'm not, I'm not here to gloat what I'm here to tell you is there's no way in hell in 2017 as a solo agent, I thought that I would be. The number one agent in a category that gets literally talked about at 29 market centers in my region. So, um, you know, just, it's something for people to understand, like you can do this, right? Like I'm just, just a regular old dude, man. You know, I'm just a dude who likes to invest in real estate. I like to talk real estate and I like to work with investors who like to work in real estate. And that niche has enabled me to build a business that, you know, afforded me to, to do that, that make that accomplishment.

Jacob: 54:54

Boom, boom, Mike. What a, what a way to end the episode. Ladies and gentlemen, you can do this. You can do this. Mike and I are here to support you, um, to help you accomplish your real estate investing dreams. And you can do this. And so I'm your host, Jacob Sandoval. You can find me on all social media channels at cashflow saga. That's at cashflow saga. He is our cohost, Mike Magno. You can find him on all socials at realtor, Michael Magno. We are the financial freedom fighters podcast. If you enjoyed this episode or if you enjoyed any of the other episodes, please consider giving us a five star rating and leave us a review. It would really mean the world to us. We will be back with another episode. I think we're going to be talking taxes next episode, Mike. So that's a huge, huge part of real estate investing. Um, i'm going to bring my CPA on, it's going to be great episode. So stay tuned for that, but we are signing off. We are the financial freedom fighters podcast. Peace.

Mike: 56:01

see ya.

Nancy: 56:02

Goodbye