Doing Real Estate In A Big Way—From Market Crash To Mogul

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Hey, it's Mark Podolski, the Land Geek with your favorite niche real estate website, www.thelandgeek.com. and I'm super excited for today's guest. But before we talk to our guest, I'd be remiss. I didn't properly introduce my co host, Six Sigma. The brain, the professor. You know him, you love him. Scott Todd from Scott todd.net landmodo.com and most importantly, not automating your Craigslist and your Facebook postings. Posting domination.com thelandgeek Scott Todd.

How are you, Mark?

I'm great.

How are you?

I'm good. I'm good. I'm a little intimidated. Two Florida guys on the podcast.

Two Florida men, right?

You know, two Florida men.

The good ones, not the crazy ones.

It's true. Yeah.

I don't know. I mean, you know, both of you have the wherewithal to own gators.

We do. And there's no proof that we don't own gators.

So it's, you know, I'm just going to tread very lightly on today's podcast with you guys. But let's talk about our guest, because I'm gonna put on my anchorman voice. Scott. He's a big deal. Lee Carney from flipyourincome.com has done over 7,500 flips. He's done over a half billion in sales. If you have gone to a RIA meeting, you probably know the name Lee Carney. He's one of the biggest and best in the house flipping in the country. Lee, how are you?

I'm doing good, besides Hurricane Michael.

I'm doing good besides Hurricane Michael. Were you affected?

Oh, yeah, yeah. We're still doing asset checks, and we can't even access our three worst properties. I got some live satellite imagery today from the NOAA website, and it's pretty gnarly.

Wow.

Wow. So, Lee, let's just kind of rewind the tape and take US back to 2003, your first accidental flip. And what were you doing before then? And just. Let's just kind of hear a little bit more about your story.

Sure. My story, like you just said, started out by accident in 2003. I was living in Ireland at the time. I'd gone to college in Florida, went back to Ireland, was supposed to run my father's company ended up in corporate sales for his company. Kind of working my way up through the ladder. So it was a low draw, high commission job that was doing really well at that. I bought a condo, bought a penthouse, thought it was going to be awesome. Got broken into. Within a month. The kids would actually push all the buttons, See who wasn't home, and break into the people that didn't answer. So my unit got hit. I said, you know what? I'm out. So sold it. Made about 35 grand, which was a little bit more than my base salary. And I'm thinking, okay, I just made this for doing nothing, essentially. So I need to look into this. So that's really when I caught the real estate bug, which is back in 2003. Decided to pack up shop, moved to California. And one of the first things I did when I moved there is I just asked a lot of people questions. I tried to find a mentor. And I didn't really even know what a mentor was back then. I just knew that I needed someone to tell me about real estate. So what I would say to everybody out there, don't be afraid to ask a bunch of questions. They're not stupid questions. If you don't know, it's because you haven't done it before. And that's okay. I can definitely relate to that. And that's why when people ask me some of the most basic questions, I'm never condescending, because I was the guy asking those questions. This mentor, a guy I went to church with us at the time, showed me what area to buy in, what kind of price point to buy in, Even some key things like, hey, you need to put down sod in a sprinkler system. We're out in California and in the low desert, and you've got all these dirt yards. Leave a nice, green, bright yard. A nice green, bright yard. It definitely sold the house. And so I picked up some tips from him on curb appeal and price points. Took me about four months to find my first purposeful flip. So I bought the house. It was a probate deal, used an agent. I didn't know where to go get the deals myself, so I did a more traditional route. Bought it for about 130, sold it right around 185. Took about three months. And that's when I made my first mistake. Even though I made net, net about 35,000, I tried to live in the house while flipping it. I was a college kid trying to save money. Disastrous idea. So if you're trying to live In a house that you're flipping and it's a business, don't do that. So then I actually made my second and third mistake on my next flip. Bought my house in California, decided to move back to Florida, and I decided to remotely rehab. That's another big mistake. Don't try to remotely rehab. We had a three or four week job that took six months. I made my third mistake, which is where I hired a friend to do it. And so even though I made three mistakes on two houses, I still made money. I'm up about 50,000 at the time. That was a lot of money from two properties. So fast forward to 2005, I'm back in Florida again, asked a bunch of questions, tried to find a mentor. Just so happens one of my friend's fathers flipped foreclosures. So I'm asking questions like, what is a foreclosure? So he tells me what a foreclosure is. Like, where do you buy foreclosures? He said, the courthouse steps. I'm like, what is the courthouse steps? He said, you go to this room at 2 o' clock every day and they're auctioning houses. So I go to the auctions. They're not auctioning houses, they're auctioning case numbers. So I'm like, what do these case numbers mean? So I asked a bunch of questions. Finally, after a couple weeks, found out that there's a lady selling a book that turned those numbers into addresses. So now I'm thinking, okay, man, I'm off to the races here. I can bid on houses. So I got the book maybe like a week or two in advance. I drive all the properties in the morning and then I go to the auction at 2 o'. Clock. So it took me about two, three weeks before I dipped my toe in and bought. And that's one thing I did right. And I would say to everybody out there, do your due diligence. I mean, at some point, you know, when you got ready, aim, fire, you do have to fire. And I think a lot of people's problem is they just spend a lot of time getting ready and aiming and they never fire. And that's a problem in itself where you've got the paralysis by analysis. They want to build out their business plan and set their goals and create action plans and build out a nice office and buy new furniture and then they're not even flipping a house. So at some point you do have to fire. But I do think that there's a balance there between trying to understand the arena that you're playing in, then jumping in and actually doing it. So bought my first house. It was ended up being a homeowner's lien. So I paid $7,000. What was great about that is that I didn't have to pay off the mortgage until closing. And so I'm really hungry for this deal. I actually tracked down the person who's in foreclosure, got his Social Security number so I could log in and get his bank balance and get his payoff. So deal worked out great. Paid seven grand for the house, 140,000 payoff, I think put about $15,000. I hired my college kid buddies to fix up the house with me at night and I probably made about 40 grand on that deal. Sold it for 205. And this was back in 2005 when things are really heating up. The California market, by the way, I should note, when I was selling that house in 2005 and finally did sell it in 2005, the California market was already starting to shift. I could see cracks in the armor. I didn't realize that there was market cycles or any of this stuff that we'll probably talk about on this interview. Made a bunch of money. So between 2005, 2007, I had a good 50 deals under my belt. I made over about $2 million, had a million and a half in equity. I'm thinking, man, this is great, this is never going to end. I'm a 25 year old guy, 27 at the time, I've got a couple million bucks, I'm doing great. Little did I know that there was going to be a global collapse, not only in real estate, but in worldwide markets, everything. And so I got crushed. And the reality is in about 12 months I saw my net worth go from $2 million to negative $1.5 million. And so shaking out all of that debt and really settling everything, not having to file bankruptcy. And I would say to everybody out there, don't file bankruptcy unless you really have to, because that's going to haunt you for the rest of your career. What's one of the first questions a lender asks you or anybody who's doing business with you when you have to fill out a form? Have you ever filed bankruptcy? So, you know, I thank God that I did not have to file bankruptcy. I was not over leveraged. I was able to liquidate everything and just kind of get everything corralled to a point where I essentially end up back at zero. When I say zero, I think maybe I had 20, 30 grand to my name, something along those lines. I mean, I wasn't on food stamps, but going from $2 million to $30,000 was tough.

So, Lee, I know a lot of people that went through that crash, especially here in Phoenix, and they spent a couple years figuring out something else to do and shied away just out of fear and just the bad taste of everything that happened out of real estate. But you stayed in it. Why is that sure?

Well, that's actually a good question. It's been asked a lot, and I think there's tenacity, stupidity. There's probably lots of good answers for that. But I sat down with one of my mentors. This was right around the end of 2007. His name was Frank. His nickname was Bumper. And I said, bump, what am I going to do? I'm broke. I'm waiting for some really detailed answer. And he looks me dead in the eye, and he said, son, I said, yes. I'm waiting for this epic answer. He goes, you got to sell your way out of it. I'm like, well, that wasn't the answer I was expecting. I really sat back and thought about what he was saying. This is a guy who made millions of dollars flipping mobile homes. He was a mobile home king back in the 70s and 80s, was the largest seller of mobile homes in the entire state. I really thought about that. I said, I'm not going to dig my way out of this hole by just sitting and doing nothing. And that's really what I took away from that. I did take massive action. I said, okay, I got my butt kicked rehabbing houses because I'm rehabbing houses into a downward market. So I'm like, that's the wrong strategy. And I will say this. I learned two lessons about real estate that day. Number one, there's always money in real estate. But the second lesson I learned is that you have to be on the right side of the trade. So I said, there's clearly people making money in real estate. I'm not one of those people. What are they doing? And I looked around, and who do you think was making money in the market back then?

The buyers.

The buyers, wholesalers, wholesalers, were making all the money. Why? They took risk off the table. They're just day trading real estate. They didn't care if the market was in the toilet. They're buying and selling same day. They're collecting their fee and moving on. Now, the buyers were making money, too. To your point, those buying the foreclosures rather than the people getting foreclosed on. Were snapping up deals like $30,000 for a house that I had valued at 150,000, mortgage for 100,000. They're now buying my house for $30,000. So you're absolutely correct. The people stacking up assets at that point in time in the market cycle were making money, and the wholesalers day trading real estate were racking up cash. So I think that there was two things going on there. There was people getting hood rich, there's people creating wealth, and that was really what was going on. I decided back in 2008 I needed to be hood rich because I had no money. So I just wanted to focus on stacking up cash. And so what I did as I started wholesaling, that's all I did. I tie up contracts from the mls. I realized speed to market was important, so I'd make sure my offer was in within five minutes of it being listed. So it would come into my email house. To fit my criteria. My system would have an offer cranked out in five minutes, and basically we're paying full price, zero inspection, close in a week. Because the deals were that good. I would close on as many as I could get. Then I would turn around and wholesaling, and people were actually coming to me going, hey, Lee, did you get that house, Mike? Yep. So it's that price of the MLS +10K. And so I wholesaled almost 100 deals in 2008. Literally within months of losing everything, I started back into the right strategy, and I probably stacked up close to a million dollars my first year back into real estate again. Now, since then, the rest is history. Over 7,500 transactions. Our biggest year in 2013 when we were partly operating for a hedge fund and helping them buy properties. I did in my record month, 260 transactions out of my office. I mean, we were about to pull our hair out. I mean, that's. What's that, a day? 26 transactions? No, 13 transactions a day per business day. If you take 20 days in the month. I mean, it was just insane. It was just absolutely insane. I remember one Friday, we had, I think, 40 closing packages that day. I mean, it was just ridiculous. Now, great money, but a lot of stress. And actually, that stress put me into bad health. My appendix burst. And I said, you know what? There's got to be a better way. But what I did learn is how to institutionalize my business. When I look back five years ago, I can say that's the point where I turned the corner and turned from being a real estate investor. To actually being a real estate business and having institutional processes. So, you know, by, even with our rental portfolio, we'd be considered a mid size investor. We got up to managing several hundred properties, personally owned 320 properties, over 25 million in rentals. And so I've learned how to do things in a big way. A lot of that's down to systems, processes, the right software, more importantly, giving your team the right tools. You can't see it here from this podcast, but I got six screens around me here. All of my staff has four screens. We got the right tools to be able to process things correctly and to be able to use all of our tools efficiently and quickly. And that's, that's one thing I notice a lot of people don't invest in. They'll have a nice desk and a nice chair, but they won't have a good tool. They're working off, they're working off a laptop in our business with a lot of moving parts. If you want to process information quickly, having, having the right setup definitely helps.

Scott, Todd, what are your thoughts? Well, hey, Scott, you're on mute.

I mean, where do you start at this point, Lee? So let me ask you a question. When you talk about, I got a couple questions. One, when you start talking about institutional, your business, you're just talking about building processes around it and creating systems so that people can do the work and that you're not having to do it. Right?

Sure, yeah. I mean, at the end of the day for me, when I say institutionalizing, it's what I learned from an institutional hedge fund that I was dealing with is that they track everything. So all the data, the reason you track all these data points is because you can get the, you can get good reports. You have to track data in order to get good reports. So we track all the different characteristics of every home. The size of the home, the size of the lot, the year built, number of bedrooms, bath, square footage, where we bought it from, how we sold it. You know, we track all of this information and by doing that, I can look back at reports and get live reports to tell me how I'm doing. You know, I've got a debt tracker every single day. I know every single dollar of debt I've got, where it's allocated, whether it's available or pending, active in rehab, on hold and trash out. So I can see that pie chart every single day. And that's what I mean by institutionalizing your business. It's having everything tracked, having all of your data in a software and having the right people behind it, as you say, managing each step of that process. What I did specifically to make sure that my IP was protected is that I got one person specialized in pre acquisition, one person in the acquisition closing side, one person in sales. I've got a construction team, I've got a sales team. And so that way everybody specializes doing a lot of their section of the business, but no one understands the entire process.

And so you're collecting a lot of data. Like you said that the year the house was built and like the lot size. What are you doing with that? Like, how is that helpful to you?

Okay, that's a great question. So we'll look back where we made money and where we lost money. We're trying to find correlations. So to answer your question specifically in a really good way, we realized on older assets that we rehabbed, we were losing money. So now as a result of that data, I don't rehab anything older than 1990. That's my cutoff. I don't want to be replacing pipes underneath the house. I don't want to be rewiring houses. So our cutoff is 1990 and a mobile homes is 2000 and next market cycle as a result of all my rental data, I'm not going to own a rental more than 20 years old. That's my cutoff. So yeah, the age of the asset had a direct correlation to profitability.

That's really interesting. So Lee, with all your expertise and all your experience, what's some of the worst advice you see or hear given?

Oh man, where do I even start? I would say that building a rental portfolio at the peak of the market is probably some of the worst advice I've heard. That's not being on the right side of the trade. I mean, let's take my properties. Every landlord in this town is selling their properties. So if I bought them for 30 or 40, put 20 grand into them and I'm selling for 150,000, I'm on the right side of the trade. Selling that asset, the person buying that property, even with an 80% conventional loan putting down 20, 30,000, mortgaging 120 at the peak of the market to build a rental portfolio after debt servicing that may or may not throw off $100 or $200 a month and will more than likely have negative equity within 12 to 36 months is probably realistic for that. They're on the wrong side of the trade. So what I've realized, to answer your question really specifically, there's a time and A place for different strategies in real estate and especially with rentals, there's a right time to buy rentals and there's a right time to sell them. One of my other mentors really described this. Well, I thought the way he articulated this was good. He said it's not important to call the bottom of the market. What he means by that. If I bought a 30 or I bought a 40 or I bought a 20 or bought at a 50, I'm doing good, but it's important to call the top. And so I've always. That message has haunted me. And as I see prices peaking here in Florida, I unloaded my rental portfolio. I started that process over a year ago. I'm about 90% divested. I've got about 10%, about 30 properties or so to go, and I'm out. That's some of the worst advice I've heard, is that people talk about cash flow, cash flow, cash flow. What they're ignoring in that equation is their balance sheet. It doesn't make sense, even if you are cash flowing, to have an upside down balance sheet, or potentially one. As you scale up the ladder, you go from being an investor to being a speculator. Because if you know the market's peaking and you're buying something to hold it, you're speculating at that point, I don't think you're an investor. I think you've kind of crossed over into being a speculator. So I think for me, that's bad advice is to always buy rentals. I think there's a time and a place in the market cycle to buy them. There's a time and a place to sell them.

Excellent, Excellent. Scott. Todd.

All right. So knowing what you know, so you're getting rid of your rentals right now. What are you doing? What's your strategy now? Sure.

So we're doing some very, very specific things right now. My specific action steps in this market, we're reducing debt, we're reducing leverage. We're also buying and selling at lower price points. So I'm not rehabbing 500,000 our houses. I'm rehabbing at median price and below. Even besides that, I'm doing easier rehabs. I spoke about that earlier. I've made my cutoff 1990 or newer, and even then, I've made my level of rehab, only rehab houses that need cosmetics. So again, lower debt, lower leverage, lower price points, lower level of rehab. And then the last thing I'm scaling up is wholesaling. So our ratio of retail to wholesale, we're Doing less retail and more wholesale. So that's specifically what I'm doing. I'm not just talking about it. I've made a big shift in my business. I, over the last 12 months in order to do those things and get risk off the table. That's the primary goal of everything I just said is I'm trying to reduce risk.

Yeah. You know what I find interesting? Go ahead, Scott.

Do you think there's a potential that you're jumping the gun, right? You're getting out, you're running. And I hear what you're saying. You have a big portfolio, but at the same time are you trying to call the top of the market and get out as. As opposed to kind of just saying, hey, if I'm a long term investor here and being that long term investor, like I. Like if I was a long term investor in stock, I don't care if, I mean you would care at some point. But essentially if you're just like buying it over time, the whole portfolio as a whole will be, will be okay. You're buying in down markets, you're buying in up markets. Right. I hear what you're saying and it's really coming down.

Okay, I hear what you're saying. But I can buy that same property and I can cash flow $500 a month or I can buy at the top of the market and cash flow $100 a month. Also, if you look at IRR, if over that five year period my portfolio tripled in value, which it did by the way, the five to seven year period, it literally tripled in value. My IRR is through the roof. So it really comes down to your willingness to be able to trade at the right time. And I guess I can guarantee you my IRR is more. But going back to your point, for simplicity, a lot of investors I guess don't care about that. But for me, I'm very interested in irr. I want to make the most amount of money in the least amount of time with the most amount of leverage. That's my strategy. By buying it low and selling high and looking at those market cycles, I'm able to do that. I would rather, I mean, I could literally, I guess going back to my previous point, I think it would make sense to take that $30 million of rentals, park the money in cash and buy back twice the amount of houses for that same amount of money rather than ride out the market cycle. So that's where, yes, you can do that. And so to your point, specifically, we're moving into Some safer asset classes for long term holds as we ride through this next market cycle. Specifically student housing. That's one area we're delving into. I'm actually flying to Oklahoma on Thursday looking to take over. It's about 150 unit building and so that's going to be an asset that will. Hopefully I'll tie up that deal this week. We're also looking at multifamily. Now, I'm not as hot on multifamily as everybody else. I know that's the buzzword out there. The problem with that is all of the things being equal. If demand goes up, what happens to price? Price is going through the roof. So I'm seeing multifamily trade at crazy cap rates because people just want to say, I own 500 units, I own 1,000 doors. But they're paying prices that just don't make sense. Also, you've got rates rising. And so if you're buying something at a 7 cap and your cost of capital is 6%, I think you're in a pretty scary place if you ask me. I don't want to work off those kind of margins. I don't want to have a bunch of assets on my balance sheet where my liabilities are real close to what the assets is worth. It just doesn't make sense for me. A healthy balance sheet for me gives me a good sleep at night as much as cash flow does. I look at both things and I think going back to your point about just writing it out, I think a lot of people ignore their balance sheet. And I don't think that that's the smartest approach in real estate. Yes, you can make money, but I think a seasoned investor looks at all of these things. They're looking at the full picture, both their balance sheet and their cash flow and their P and L. So you really got to look at all three things.

Gotcha. I love it. I love it. So Lee, I mean, you kind of glossed over, I think one of the most interesting things which was scaling to the next level. So I used to do investment banking. One of the biggest challenges, what we would see is a company, you know, with, let's say 5 million revenue, get to 500 million in revenue and you get new problems every time go up, you know, let's say 10 million revenue or whatever it is, depending on your industry. What did you learn from scaling and what mistakes did you make? And why do you think you were so successful where other people, you know, you go to a RIA meeting every, you know, 99 people in there. They've done, you know, a couple flips. Right.

But you can do 100 or no flips. They've gone to RIA meetings for years. And just like the idea of being around investors and never actually done a deal. I see that a lot of RIAs, they're dreamers.

So what, what allowed you to scale so quickly?

Sure. I think some of the biggest mistakes I learned along the way is on my reporting to not just look at averages, but to look at outliers. And what I mean by that is to look at problems. And so as you scale up, you can have a rehab that sits around for six months. You can have a house that doesn't sell for six months. So what we've done as we scale up to make sure that no house is left behind, no assets left behind, I have report any rehab over 60 days that gets pushed to me every week. Any house that's been available for over 60 days gets pushed me. So I've created reports that creates limits and basically outlier reports for every aspect of my business. So here's the norm. If it's within the norm, the manager can handle it. If it falls outside the norm, I get that report. If we've gone over budget X percentage. So that way, then everything operates within normal range. But when it's outside the normal range, that's when it lands on my desk. That's the biggest thing I've learned from scaling up is that you have to allow for normal course of business, but then you also need to identify what those lower and upper limits are when something crosses outside of the normal range. If you look at a bell curve, you've got the normal. This is basically where most of your data is. But then as you go out, you get those outliers. That's what you need to see as a business owner, because otherwise you could be busy saying, well, my average days on markets, 43 days. You could have one house sitting there for 300 days. I mean, that's crazy. We're not in the business of buying and rehabbing. We're not in the business of buying. We're in the business of buying, either buying and selling or buying rehab and ultimately selling an asset. And because most times we have leverage, times your enemy, because the market's typically not going to out appreciate your cost of capital and your holding costs. So therefore, our equation is to move assets as quickly as possible from buying them to disposing of them.

All right, fantastic. So, Lee, we're at that point now. The Podcast where we're going to ask you for your tip of the week, a website resource, a book, something actionable for the art of passing income Listeners go right now, improve their businesses, improve their lives. What do you do?

Sure, sure. I actually have a board. I'm going to read it right now. I write what I'm focusing on for the week. So that's what I was going to use, my tip of the day. I found myself task saturated the last couple weeks. So what I did was I set my goal, become more efficient with my time. And so even though I focus on that on the past, my goal for this specific week is to figure out where can I find efficiencies in my time. Because if I've got tasks that are all creating revenue, which by the way, I've got a to do list like the length of my arm, it's all opportunities, it's all money. I've got to figure out how to filter through the best of those opportunities as quick as possible, not waste time on things that don't create revenue. So that's my specific goal for this week, is really making it a focus on finding those efficiencies with my time.

All right, fantastic. Scott, Todd, what's your tip of the week?

Mark? My tip of the week is a website called realtimeboard.com and@realtimeboard.com you can kind of think of it as like a whiteboard but online. Right. So as you know, our teams are in different places and they're spread out so you can essentially create a kind of a virtual whiteboard if you will. They can contribute to it, but also you can interject some cool things like, I don't know, like spreadsheets and other stuff through there to kind of work with your team. So the pricing is pretty cool and they also have like a mind mapping feature. They got some other things. So pretty cool place. If you're looking for something that you can kind of coordinate with your team better, this is the place to do it.

This is geeky. I love it. I love it. Well, no one's going to trump my tip of the week, which is going to be learn about how Lee Carney makes millions. Go to flip your income.com flipyourincome.com and he will walk you through his seven step process on how to find and then ultimately flip a house. And flip lots of houses. Flip lots of houses. So, you know, we'll have a link to flip your income dot com. I do want to remind the listeners that the only way, the only way we're going to get the quality of guests like ali Carney from flipourincome.com is if you do us three little flavors, little three little flavors, three little favors. You got to subscribe, you got to rate, you got to review the podcast. Send us a screenshot of that review to support thelandgeek.com we're going to send you for free the $97 passive income launch kit. Please do that. It really, really helps. So, Lee Carney, are we good?

We're good.

Scott, are we good?

We're good, Mark.

All right. I want to thank all the listeners and just remind you let read them ring ring. Thanks, everybody.

Thanks, guys.

Thanks for listening to the Art of Passive Income podcast. Start your journey at www.thelandgate.com and www.scotttodd.net. rate and review the podcast and email supporthelandgeek.com your screenshot for a free passive income launch kit.