Real Estate Rule 7: Never compromise Principles when buying Rental Properties

Hey YouTube, it's Christian and Cody. We are back this week in Missouri. We're checking out this beautiful property over here. It's super windy, so if our camera blows around, I apologize. That was almost right on cue. These buildings are gross. We're not going to buy these. However, we're in Missouri. We're driving a whole portfolio. This is going to be a whole lot of fun. This week's rule, we're talking about rule number 7: don't compromise on principles. Now these rules of real estate are our principles. Right now we have 35 of them, we'll probably develop a few more throughout the series. Never ever compromise. If it's not the right deal, don't do it. If you have the wrong partners, don't do it. If it doesn't fit into your model and your specific principles, just don't do it. Now, quick disclaimer: all these are the principles that we adhere to and the rules that we have for real estate. You are going to come up with some of your own and what works for you. The important thing is that you never ever violate them.

This rule is one of the most important. At the end of the day, you're going to create your own principles like Christian mentioned. If you— this is— wow, this is wobbly. If you go out there and you're actually going to go violate those principles, it'll make it very difficult for you to repeat success. If you're looking at it long term, the more complicated something gets, the less repeatable it is. And so if you can stick to rules, yes, there will be times where you can't hit every single rule if you have 1,000 rules, However, if you can make it simple where you can just set out, okay, if it doesn't hit this box, I'm not going to do it. If it doesn't hit this checkmark, I'm not going to do it. In our case, we can never do a good deal with a bad partner. If we partner with someone who's not the right fit for the deal, it will not be a good deal regardless of how the numbers look, because you can't do a good deal with a bad partner. That's a rule that we live by. And so we can't violate that. Another one is we're looking at this location. Well, Nobody lives here. There's 100 people in this town. We drove through, we found the property. We know the property owner in this case. It's not something that we would buy because one of our rules that we can't violate is if we wouldn't live there, why would our tenants? So we're not going to buy somewhere that we wouldn't be comfortable living. And looking around here, it's a little bit rough. Almost every window's shattered. Their doors are all wide open. There's mice inside the buildings. The roof is shot. It needs a little bit of love. But even if we put money into it, improving the area, there's not going to be enough people that would want to live here. And that makes it difficult for us. And we can't violate that principle.

Now, if you're just starting, a principle that you can't violate is cash flow. Now, when you accumulate a ton of cash flow, you can get a little bit more creative, take a deal that's a little negative in the future, but you're not going to do that starting out. If you start out with something like negative cash flow, You're going to lose the real estate, violating our previous rule. How do we own it? How do we never lose it? If you can keep those benchmarks in front of you and you keep buying cash flow, you will win in real estate because in an up or down market, you're getting paid to wait. Violate that principle and that's how you lose real estate. We know people who've done that 2 times over. They did it with condos, then they did it with office buildings. They bought a little negative. First time they tried it, 2008 hit. Then they bought a whole bunch of office right before COVID hit. You can't control everything in your universe. That's why you don't violate your principles. Now, Cody, what do we do when two principles conflict? Because if you have 35 rules, occasionally they're going to contradict each other. What do we do in that case?

Well, we need to look at the one that has the most influence over the current situation. But at the same time, as you grow, you will need to adjust your principles. What gets you to one place will not necessarily get you to the next level.. And so if you start out buying 12-plexes, there may be a point where it makes sense to start buying 50-unit complexes, and you're going to underwrite those a little bit differently. So as things start to conflict, you need to reassess where you're at compared to where you got started and keep that in mind as, okay, maybe this principle isn't as valid for this stage in the game. Maybe they are both valid. Maybe there's one of, okay, you can't do a good deal with a bad partner, but you also can't do the deal without a partner in that situation, you don't have the right person. Mm-hmm. You may need to just go out and talk with more people, but you need to assess the situation and say, okay, is there a way I could do this without a partner that could hit both of my principles in that given situation? Or maybe it's just not the right deal for me at the time, or you need to adjust your principles and find a way to put it together.

And you'll see these in Coming on the Real Estate Rules, but that's the situation that Cody and I had fairly recently where one thing is you always honor your word, period. You say something, you say you're going to do it, you do it. However, when you're not comfortable, at some point you also have to go with your gut, and you can't do a bad deal with the wrong partner. We've had a situation where we got uncomfortable with a partner after we told him we were going to do a deal. It was really uncomfortable, but we had to pull that deal. We had to put a hierarchy of what is more important right now. Can we afford to do a deal with a bad partner Or do we need to do exactly what we said we'd do under a different set of circumstances? It sucks when that happens. You never violate principles, but when two principles are in conflict with each other, you have to set some priority and make a choice. So don't get stuck on this, but definitely write down your principles, your rules for yourself when investing. Follow them to the T, and if you have to renegotiate them, make sure that it is a rule that you can stick with in the future. If you're making a change think about it.

And it was the right decision to pull out of that deal. We don't like to compromise on any of our principles. We really don't like to go back on what we say we're going to do with people. However, if it violates the partner principle, that is the one that's going to be more powerful than the majority of the rest of them, because a partner, as Christian and I have seen in our past, can really put a damper on things. That made it very, very financially uncomfortable and it put me backwards financially with my very first partnership. Was not fun. It was not easy to get out of. Christian had partnerships in the past outside of the real estate space that were also very uncomfortable.

Lost all of my money. A lot of relationships burned because I had the wrong partners. Cody, at age 21, picked up a ton of bad debt, multiple six figures, just starting real estate to rectify a problem that wasn't his from a past partner. We can't do that again. Make sure you write out your principles. For us today, we have 35 that we don't violate.

We'll probably grow that to a few more, and some will, some will change over time. We might get rid of some, but as of right now, if you write out your principles and you put a priority as, okay, this is number 1, this is number 2, this is number 3, and you layer those out ABC, you're going to know which ones come first when there becomes a conflict.

Mm-hmm. Now we'll keep posting some videos. We'll be in Missouri all week this week, so we're gonna have some properties that we love. We actually already checked out a property, also a little rough, but we love the area. It ticks a lot of boxes. We're going to talk more about that property. We'll show you some of the adventure, but we're here all week. Then we cruise over to Texas where Cody has the opportunity to speak at DealMaker Live. So we'll have a ton of updates coming to you. If you haven't yet Submit your questions below in the comments for Whiteboard Wednesday. We're going to be hosting it. I think that's the day we arrive in Dallas. So we'll probably be in Dallas going through your 5 questions. We have a few great ones. We have room for a few more. So if you have questions about real estate or want to know anything about investing in the great state of Missouri, feel free to drop a comment below. We really, really appreciate it.

So until next time, check out our other videos too if you want to figure out how to find these properties. Some folks are still asking us. How are you finding all these off-market seller-financable deals? Yes, this is seller finance. Yes, it is gross. We're not buying this one, but we're looking at some other ones. We've actually put that in another video, how to find every property owner ever. That is the only way we are finding these types of deals, and not just this type of deal, but deals in way better locations. So check that out. We will put the link in that below.

You can do it anytime, anywhere. We'll put the link below. Also tag it right up here. We'll link to that video. Like, subscribe. We will see you guys on Wednesday.