How NOT To Be An Idiot in Real Estate

You're wholesaling and you never get into buy and hold?

Airbnb arbitrage.

You are an idiot. Sorry, not sorry.

Don't be an idiot. This could be the best video we've ever launched. However, it has no plan. We chose this topic because it comes up all the time. I know for a fact we have a ton of good points on this, but they're going to come at you in no random order except for the last one. So stay tuned all the way through. Don't you dare skip to it because there are a lot of great golden nuggets. On how not to be an idiot in real estate.

Welcome back to the channel. My name is Cody. This is Christian. We're talking about how to not be an idiot. Don't be one. And what Dave Ramsey would call stupid on steroids. Stupid, stupid. But if you don't want to be an idiot, step 1, don't have variable rate mortgages.

Yep.

That is a solid start. To play the game the right way. Step 2, don't build your business off of appreciation alone.

Yes, I've seen so many people lose portfolios that way. That seems to be the easiest way to lose the game, which is one point to Dave Ramsey because he does say that is the biggest downfall of debt, short-term or variable rate.

If you want to be smart, build off of positive cash flow. Now, step 3, you don't hold any real estate. If you are just flipping through contracts or flipping real estate you're wholesaling and you never get into buy and hold, Airbnb arbitrage, you are an idiot. Sorry, not sorry. Sucks to suck. Don't be an idiot. You have to hold real estate for a very long period of time to consistently make money. You can get a lot of income by flipping contracts. I know people that make tens of millions of dollars flipping real estate, but they also hold a lot of real estate. They built their base off of fixed rate debt, long-term holds, and cash flow. They're making tens of millions of dollars, but they're plugging all that money into long-term holds.

Two more coming at you. Starting in single family or staying in single family, don't be an idiot. You cannot build a large enough business off of single family to make it make sense. You will hit a point where there is no amount of systems and processes that are cost effective to do that. What you're ending up doing is you're going one rental contract per building, per utilities, per roof, per siding. You want to spread out as many expenses as you can under one roof. Your maintenance costs go down globally. Your cost to manage go down globally. The efficiencies to scale— it can take you to get to 100 units, it could take you 2 or 3 contracts as opposed to 100 contracts to get to the same place. You cannot compete with multifamily going single family. Not possible. You will not reach your goals unless your goals are very, very small. Conversely, starting too large. There's a lot of people and a lot of coursework online that says, hey, go ahead and syndicate, crowdsource, do whatever, and buy your first 200-unit building as your first deal. I promise you, you will make mistakes on your first deal you will not make on subsequent deals. Now, you could do a really good job, but you will not do as good on your first deal as you do on your 10th deal., and the CapEx on 200 units will bankrupt you if you're not planning for it.

So don't be an idiot.

Yes, everything will take more time, more money, and we see an average is usually about 3 times. Like, when people project this, this is very standard. It will take you 3 times as long to complete your projects and cost 3 times as much as you first expect. Now, once you get more experience, you can do more expensive projects because you actually know the cost. When you're getting started, I think that's the most common piece of feedback we get in our mentorship group after people close. They're like, Oh my gosh, this took some time. It takes some time and it takes some money to take an asset and reposition it.

Next on the list, don't partner with people if you don't know their goals and where they're coming from. Oh my goodness, people do that too often and then they end up in an ugly divorce of a business relationship.

More relationships fail in business than succeed by a fairly astronomical margin. Does not mean you can't have a good partnership, but you will not have the partnership you expect if you do not know their goals.

And even if you have known them for a bit. Don't partner with people that can afford to bury you. That's a bad idea. And, uh, if they get the opportunity, they very well might.

Exception to that: there's a certain point where everyone can just afford to float lawyers forever. And apparently, rumor has it, that number is about $20 million of net worth is where you have equal power up until some billionaire comes in and can just outplay you. Uh, but generally speaking, If you're going to say you're building your first million, do not partner with someone who has $100 million as your first.

That would be stupid.

They can destroy you. You cannot defend yourself even if you're right. That's why I think a lot of people— here's another one. Don't assume you're going to win a lawsuit because you're correct.

Being right and winning, those are not the same in this business.

Yes. Now, fortunately, Cody and I have dominated on the legal field. That being said, we had to build up a pretty healthy base of cash flow to do so, and it is ludicrously expensive. We've had a few people— I will not name drop so we don't get sued by someone bigger— but we have mentees who have partnered with astronomically large billionaires and gotten burned, and they were right. And they're like, should we sue them? No, you will lose. Being right does not matter. They can afford to drag it on and make it more expensive than they can possibly afford. They are just more powerful. So be careful on partners. And yes, remember that being right does not mean that you are going to win.

And lastly, for this video, don't make emotional purchases. That is stupid on steroids.

Yes. And most new investors will do that at some point.

Absolutely. It's super exciting. It's super fun to go out and buy real estate. Especially when you figure out you can buy it with next to no money out of pocket. However, don't let your emotions get the best of you. Buy based on positive cash flow with long-term fixed rate debt, or no debt at all if you've got the money.

And we said we have no plan for this. I realize I still have a few more, so we have a few more very last ones. Deal. Do not skip due diligence on a deal. Probably second or third most common mistake I see in real estate, and it comes from the emotional thing. People fall in love with the deal or they've told all their friends and family, hey, I'm going to buy this and they don't want to let everyone down. Do the due diligence. Do it, do it, do the deal. When you go through this, you're going to make sure, hey, the bank statements line up with the stated income, the leases match those bank statements, the expenses match the P&L, which also matches the bank statements. There's a lot of things you catch in the financial due diligence. That take honestly probably an hour of review and you can catch all of them. Common things people will do. Owners pay people, vendors, employees under the table and it doesn't show up in the bank statements. People look at the bank statements and go, hey, this matches the P&L, I'm sure we're good.

Wrong.

Don't do that. Utilities. Are we seeing all the utilities passed through correctly on the bank statement that we're seeing on the actual utility statements? I like to see a copy. It doesn't need to be a year of them. I want to see the last 1 or 2 utility statements to make sure they match up with what was stated. Do basic verification of income. And the last part of due diligence that I think a lot of people skip, and I know we've missed on one of our projects, does it pass the logic test? If you just look at all the things, you go, here's the incomes, here's the expenses. Do these make sense with what I would expect them to be? We've missed out on one of them because we didn't know what we didn't know about that project. Looking back, we could look at it for 20 seconds and go, no way, payroll is going to cost a lot more. If you don't know what you don't know and you're doing due diligence, find a mentor, advisor, other investor, have someone else who knows what they're doing. Look at the deal. This is why it's so important to build relationships, which is the last one that I had in mind. Unless you come up with more, is do not do this alone. Don't— doesn't mean partner.

Don't lie to banks.

Oh yeah, okay, yeah, we're gonna add that one too.

That's a good one because there's a lot of gurus that are online, they are bigger than us, that are preaching the idea of not letting the banks know about certain things, certain clauses, and a lot of certain debts. They're getting slapped hard right now, signing back properties, losing properties. It's a bloodbath and it's because they built a stupid business model off of lying to banks. Don't do that. It's a bad idea.

Yep. And I was saying, don't do this alone. If you are stuck and you are a solo investor, I'm not saying partner, I'm saying find other people and other investors in your market who know exactly what they're doing and get their advice on your deals. When you're starting, you need more input because there's a lot to this game. It's a simple game, but there's a lot of steps. Like any game, as you run through them a few times, you get to know the rules, but you're never going to be an excellent player the first time you do it. So work with other people who know exactly what they're doing.

That's it for today's unplanned guide on how to not be an idiot. There will be a part 2 someday as we make more mistakes.

I am pretty sure we can make this a 100-part series if we just go through the things that we've learned. However, that's what comes to mind today.

That's it. So don't be an idiot and hit the subscribe button. Do it.