How to Find and Fund Your First Real Estate Deal (From Scratch) (Rookie Reply)

Ashley:You’re 18 years old, you’ve barely got any savings, almost no credit history, and you want to buy your first rental property. Most people would tell you to wait. Today, we’re telling you what we’d actually do instead.

Tony:That question is real. It came straight from the BiggerPockets forums and it’s where we’re starting today because this entire episode is the anatomy of a first deal. Where the money comes from, where the deal comes from, and what the deal will really cost you.

Ashley:This is The Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:And I’m Tony J. Robinson. And with that, let’s get into our first question. So our first question today comes from Kyle in Dayton, Ohio. Again, this comes from the BiggerPockets forums. And Kyle says, “I’m 18 years old with very little credit history and little capital. I’m eager to start, but can’t get around the glaring issue of not having any initial capital. So I was wondering, are there any methods you guys would use to raise capital if you were in my shoes? Or is it just time to put my head down and put in long hours?” Well, Kyle, great question. And first, kudos to you, man, for being 18 and just even being on the BiggerPockets forms and absorbing all that information and asking these questions. But even if you’re not 18 like Kyle and you’re in a similar situation where you feel like you don’t have enough capital to get started, that can oftentimes feel like a blocker to actually getting into your first deal.So I think I’ll lay out a few things I would do if I were in a position similar to Kyle where I’ve got this desire, but I don’t necessarily have the capital to get started. I guess two things I try and do. Number one is I’d start building my network. No one’s just going to walk up to you and say, “Kyle, you look like someone that I want to give a lot of money to go buy some real estate.”That just doesn’t happen. So you got to build your network out and be intentional about getting into the rooms with people where you might be able to provide value to them. So that’s the first thing I do is I’d start building my network. I go to local meetups. I go to scrape together money to go to conferences. I hang out wherever I could that real estate investors might be.Just building my network that way, be inactive on the BiggerPockets forums and Facebook groups and wherever it may be on Instagram. Find your place and go network and build those relationships. Then I think the second thing that I would focus on is I try and get really, really good at simply finding deals. Because if you can find deals, and I know this sounds cliche because if you’ve listened to other podcasts, you’ve probably heard this advice before, but it’s said so many times because it’s true. If someone who wanted to buy a short-term rental came to me with just an incredible deal, incredible, incredible deal and I’m like, “Hey, Tony, I don’t have the money to take this deal down. Can we partner on it together?” I’d say, yes, let’s do that. If someone came to me with a boutique hotel, 10 to 13 rooms ideally in a vacation market seller financing note, I’m just putting that out there for folks who might be looking.If you can find me a deal like that and you bring it to me, 1000% I’ll bring you in on that deal and let’s do it together. So if you can find a really good deal, I think that’s one of the best ways to get started in real estate investing if you don’t have the capital to take it down yourself.

Ashley:I’m going to take a little different take and I’m going to say that you are going to grind and hustle to save for that first down payment and you’re going to house hack for your first deal. So first things, how can you increase your income? Can you sell a digital download on Etsy? Can you do couch flipping? Can you waitress or waiter on the weekends? Where are some other ways that you can increase your income? Next, where are ways that you can cut your expenses? And I’m definitely not a budgeter and I’m not recommending you live on rice and beans as Dave Ramsey would, but are there things that you can cut? Is there a gym membership, a reoccurring charge on your credit card and you’re not even going to the gym? If there are 20 different TV subscriptions for streaming, maybe you can cut different things like that.100 bucks a month, a couple of those subscriptions, those can start to add up to quite a bit of money to end up saving. So that’d be my first thing, increase your income, decrease your expenses. The second thing would be to your living expense now. So you’re 18. Are you still living at home? If you’re living for home rent-free, I would live at home as long as possible while you are saving that money. And yes, that is not the dream to be living with your parents, but one thing that Dave Ramsey does say that I do agree with is live like no one else so you can live like no one else later on. And it will be worth it now to live with your parents so that you can save the money for a down payment. So those would kind of be the things.Or if you can’t live with your parents, then I would go and live as cheap as possible. So live in a house for rent where maybe multiple… It’s room for rent, I’m sorry, room for rent where you’re just renting a room instead of getting a whole apartment. Whatever the cheapest living option is available, I would go for that just to continue to keep your living expenses low so you can actually save that down

Tony:Payment. Yeah. Ash, just one thing I could say, I totally agree. Again, Dave Ramsey’s great, gives a lot of financial discipline, but I also feel like that there’s maybe not enough focus on the offense side of this as well when it comes to personal finances. How can you make more money? And I love your idea of like, “Hey, can you go pick up a side hustle?” If you focus disciplined expenses, disciplined spending with really aggressive income generation, it’s those two things together that will allow you to really build up the amount of capital you need to get started. And one of the things I did that I’m incredibly happy about is that when I graduated from college, I job topped a lot. And the reason I did that was because every single time I did that, I got paid more money than what I was making before.I even switched industries. When I got my first job out of college, I was actually working in marketing.That’s what I did. My last few years, I worked full-time for a small marketing agency. When I graduated, I worked with a bigger marketing agency and I think I was making like, I don’t know, like 35,000 bucks a year as a new college grad. And then I switched industries to become a warehouse manager, which I’d never had any experience in. Didn’t even think that I would go down that path, but I went from a $35,000 salary to, I think it was like 65,000, 68,000. And I left that company and went to a different company that paid me even more. So if you can focus on aggressively increasing your income while staying super disciplined on your expenses, that’s how you start to build up capital faster.

Ashley:Coming up, the deal finding shortcut, everybody asks about are wholesalers your fastest way into the game or a trap for rookies who don’t know what a good number looks like? That’s next. All right, we’ve covered where the money comes from. Now let’s talk about actually finding a deal worth buying. Our second question comes from Corey in the BiggerPockets forums. I’ve been going back and forth on this and wanted to get some real world input from people actually doing deals. On one hand, wholesalers seem like a great way to get access to off-market deals without having to build a full marketing machine yourself. It feels like a faster way to get into the game, especially starting out. On the other hand, I’ve heard a lot of mixed opinions at deals being marked up too much, numbers not penciling out, or just getting blasted on massive buyer lists with the same property.For those of you who have experienced, do you actively work with wholesalers or do you prefer to source deals yourself? If you do use them, how do you filter out the good ones from the ones just pushing bad deals? Have you actually closed solid deals through wholesalers that met your criteria? Trying to figure out if this is a path worth leaning into or something to be cautious with. Ooh, this is a great question. And I’ve actually never bought a deal from a wholesaler. I’ve been on their list. I’ve actually toured offices of wholesalers in Houston. I’ve met wholesalers at meetups that added me to their buyer’s list. Every time I get a text from somebody saying, “Hey, would you be interested in selling 123 Main?” I always respond with, “No, not right now, but I would love to be on your buyer’s list. Here’s my email, please add me.” But I did wholesale one deal, but that’s really my only experience kind of working with a wholesaler. So Tony, maybe you have a little more insight into this.

Tony:Ashley gets all her deals just through happenstance. She’s in line at the grocery store and someone’s talking about selling a deal and she’s like, “Hey, I’m a real estate investor.” That’s how she gets all her deals.

Ashley:And that’s 24 hours after I just said, “I’m not going to buy a deal right now.” And the perfect deal comes up.

Tony:And the perfect deal just finds her. So well, first I think let’s just maybe define what a wholesaler is for some of the rookies who aren’t aware. So a wholesaler is basically someone who has built basically a marketing and sales company that focuses on finding off market, below value real estate deals. So they market, sometimes it could be cold calling, it could be door knocking, it could be text messages, it could be direct mail, it could be TV ads, could be radio, whatever it may be. They market to the general public for people who want to sell their homes quickly, off market, and typically below market value. Then they get these properties, they place them under contract for a specific amount, and then they resell those contracts to investors like me and Ashley and all of you who are listening for an amount that’s higher than what they got under contract for.So let’s say that I’m a wholesaler and I send out a bunch of direct mail to the 71105 zip code in Shreveport, Louisiana. And I get someone who says, “Hey, I’ll sell you my house for $100,000.” And I do the math and I say, “This house is probably worth about maybe 250 once it’s all fixed up.” So I’ll say, “Okay, I’m going to take this $100,000 contract. I’m going to sell this to Tony for $120,000. And now I get to keep that spread between 100 and 120. And Tony gets a deal at 120 that once fixed up is going to be worth 250. And maybe I put in another, whatever, 40 grand into the renovation and I go sell this deal for 250. So that’s how wholesalers make their money is they get properties under contract at one price and then they resell those contracts to other investors at a slightly higher price.But effectively, they’re a marketing and a sales organization. Now we’ve purchased several deals from wholesalers. We’ve wholesaled just a couple of deals ourselves as well. But I think everything that Corey said here in this question is true regardless of what deal source you’re looking at. If you’re going on the MLS, you’re going to see a lot of deals where the numbers just don’t make sense and they’re like, they’re asking too much and no one would buy that deal. If you go talk to sellers directly yourself, you’re going to meet a lot of sellers who want numbers that are unreasonable that’ll tell you that their houses are perfect, that nothing needs to be fixed. So it doesn’t matter what deal source you’re using. You as the investor still have to employ the discipline to do your own underwriting. So wholesalers are just one additional deal source you can use, but you still got to validate those numbers for yourself.So what I always tell folks if you’re working with the wholesaler, don’t look at any of the comparables that they sent you. Because oftentimes they’re being super optimistic and sometimes they might be using comps that are eight miles away from three years ago. You want to be able to build your own comparables for that property. You want to come up with your own renovation estimations. So don’t use any of the information they’re giving you. The only thing that you’re looking at is the deal that they’re offering you and the number that they’re asking for. And if you do that work, you find your own comps, you build out your own scope of work, you budget it out yourself and the numbers work, then yeah, absolutely. It doesn’t matter if it’s a wholesaler or not. If the deal works, I don’t care where it’s coming from.Let’s move forward with it. So I think the premise isn’t should I use a wholesaler or should I not? The question is if I am using a wholesaler, what level of discipline do I need to have as I evaluate those deals? All right, we’re going to take a quick break before our last question, but while we’re going, be sure to subscribe to the Real Estate Rookie YouTube channel. So if you’re on YouTube and you want to see mine and Ashley’s smiling faces and if you’re on Instagram, you can connect with me and Ashley at TonyJ Robinson and @walthfordrentals, and you can follow us at BiggerPockets. All right, we’ll be right back after QuickWork from Today’s show sponsors. All right guys, welcome back. Our final question today comes from Gabriel in the BiggerPockets form. So Gabriel says, “I’m a 26-year-old budding investor in the South Jersey, Philly area.To raise capital for my first property, I’m wholesaling since I don’t have the money to acquire deals and I want to provide as much value as possible to fellow investors. I was wondering, what’s the best way to get the most accurate rehab and repair costs so I can find the right deals and make sure it’s actually a deal? I want to make sure everyone I work with is actually getting a great deal.” It’s funny that our second question was about working with wholesalers and we get the third question from Gabriel wanting to be an ethical wholesaler. So I just love this question that he’s like, “Hey, I want to provide accurate numbers to the investors that I work with. ” So regardless of whether you’re wholesaling or even if you’re doing this to buy your own deal, I think one of the biggest question marks that new investors have is how do I estimate rehab costs effectively?So I’ll give you a few options and ask, I’m curious what your thoughts are here as well. But first I would say go read two books by J. Scott. The first one is the book on flipping houses and the second is the book on estimated rehab costs. Read those books once, read those books twice. That’ll give you a really solid foundation for just understanding the anatomy of a renovation and what goes into it and the different costs associated with it. So again, the book on flipping houses by J. Scott and the book on estimating rehab costs by J. Scott. And you can find those both in the BiggerPockets bookstore. Once you read those, the next thing that I would do is I would ask other investors that I know in that market or if you already have a connection with some contractors in that market, but I would just go to some contractors and I’d say, “Hey, for some of the recent jobs that you’ve done, can you give me a ballpark price per square foot on that renovation?If it was a super heavy down to the studs rehab, what’s a ballpark price per square foot on that? If it was maybe a lighter cosmetic where you’re just pulling out some flooring and maybe putting up some new cabinets and it’s mostly cosmetic, what does that look like on a price per square foot?” And now you can start using those to give you at least a ballpark on what it might be. And if you want to take it one step further, say you have a deal, say you lock a deal up and you can just pay a contractor to actually walk that and give you a scope of work and say, “Hey, here’s what I want it to look like. Here are the comps that I found. Can you walk this? Give me an actual scope of work.” And even if you just pay them that first time for their time to build that out for you, well, at least now you’ve got a repeatable process you can use for your future deal.So those are the steps that I would take to try and get some confidence on, hey, what does it cost in my specific market of South Jersey and Philly to potentially estimate rehab costs?

Ashley:I just though of this and it may be a bad idea, but what I would do is I would get three contractors and I would say, “I want to pay you for your time to do an estimate on this property.” I would have them do a full scope of work estimate detailing out everything that should be done on this property. You could even, as a wholesaler, create the scope of work and then give it to the contractor to fill in the blanks. Have the contractor walk the property, do this, give an actual estimate, like a GC do this. Then I would send this out with the deal and say, “Here are already three estimates from contractors.” And think about it as an investor, okay, you already now have three options of people you could actually hire to do the job too. So if you’re a newer investor and you don’t even have a contractor yet in your tool belt, this wholesaler is already offering you options of contractors that you could work with.And obviously as the investor, you want to vet these contractors and things like that too. But as a wholesaler, if you continuously work with these same contractors, having them do the estimates, they may start doing the estimates for free if they start getting business because of this. So I think there could be multiple benefits to actually doing it that way.

Tony:Ash, that’s a great idea. I’m on a lot of different lists from wholesalers as well, but I’ve never had someone when they send the deal out also say, “Here are actual three scopes of works and bids from contractors in this market that you can go use today.” That’s a great idea.

Ashley:And you could bake that into your fee, your assignment fee. You’re taking it a step ahead by actually doing the work of getting it quoted out for the person, getting contractors ready that are hireable to do. I

Tony:Feel like the contractors might even do that for free. If they know that you’re… Obviously you might have to be doing some volume already as a wholesaler, but if you can say, “Hey, we close five or 10 deals every single month and we just want to tie your name to these people that are going to have to rehab these properties anyway,” they might go out there and give you all these bids for free just for the ability to get in front of those folks. So Ashlyn just gave someone multimillion dollar ideas. Someone go execute on that and then give us our royalty checks once it comes back.

Ashley:If you’re watching this on YouTube, I do need you to comment below. One thing that maybe has come out of our mouths over the past, what has it been six years, if there’s one thing that you have taken action on that has made you money, please comment below so we can reach out to you to get a royalty off of whatever that comment was. Well, thank you guys so much for watching or listening. I’m Ashley, he’s Tony, and we’ll see guys in the next episode. I