Robert Leonard (02:29):
Did you know that you were going to house hack when you bought that property or did you fall into it?

Matt Faircloth (02:33):
No, I knew I was going to do it. When I bought the property, I had two buddies that lived with me in a rental. It was me and two friends living in a rental in a town called Manayunk, just outside of Philadelphia. And when I bought my home, the landlord that owned the house was going to sell it. I tried to buy that house, we got outbid, and so the realtor that sold the house for her was like, “Well, I got some other properties that you can buy?” And so they sent me a list. By then, we had moved so kind of a gun was to our head that we had to move out because the landlord was selling the home.

Matt Faircloth (03:04):
So it was somewhat forced of a move, but then these two guys were like, “Well, we have nowhere to go. Where are we going to go?” So they just came with me. All three of us just threw all three of our stuff into a U-Haul van and they all just moved to this new house with me. 25, 26 years old, just figuring things out. It wasn’t like a business decision, it just happened that way. But when I charged them rent and when I saw with the cashflow was, I was making 60 bucks a month and living there for free, then I saw it a good job. So I was just like, “Oh man, this is amazing.” So I started buying more rentals from there.

Robert Leonard (03:38):
At the time, house hacking wasn’t even a strategy, right?

Matt Faircloth (03:41):
It wasn’t even a cool name? People like Brandon Turner weren’t around or had not come up with cool names like BRRR our house hack or whatever that are now very commonplace terms. People have been doing these things for years, it’s just I think more common of a strategy now. I bought it on 3% down, not realizing… Thinking about it further, I probably should have bought a duplex, triplex, or a quadruplex on 3% down. And I tried to convince my wife when we were moving to buy a quadruplex at 3% down, I couldn’t get her to do it, but I believe that house hacking is probably the first move that a lot of new investors should make if they can convince their spouse to do it if their living arrangement works for that, house hacking is absolutely the first thing people should do, I think.

Robert Leonard (04:23):
Yeah, I agree. I fell into a house act myself. I bought a two-bedroom condo, it was what I could afford. I actually bought it while I was in college. I bought it before I walked out of my college graduation. And I was living there for about three or four months, and I realized there was a second bedroom and I never even opened the door in the first like three or four months that I lived there, I was like, “I should probably do something with this.” And so I ended up renting it out. It covered like 80% of my mortgage. I was like, “This is pretty cool.” And then six months later, I found out as an investing strategy. And ever since then, I’m into real estate.

Matt Faircloth (04:52):
That’s great. It was just sitting there doing nothing, just a vacant room. I joke with my wife that we should rent out our dining room of our home because we live in a suburban house now and our dining room gets used twice a year, Thanksgiving and Christmas. So I keep telling her, “You listen, honey, I’m going to go find a homeless guy and I’m going to get them to pay us a couple hundred bucks and I’m going to let them live in that dining room,” because vacant homes and houses are potential revenue generators. You really probably shouldn’t rent out your dining room, but it’s one of those things, just a joke that it’s a room that nobody ever uses in their home normally in that, so it could be a moneymaker. Not really, but at least it’s a good way I can liaise with my wife about it.

Robert Leonard (05:25):
Rent it out on Airbnb, you can make a couple of hundred bucks a month.

Matt Faircloth (05:27):
Right. Put a bed and a sofa in there, maybe drop in a bathroom or something like that, it’d be great. She’d love it.

Robert Leonard (05:32):
Yeah. So at what point are you comfortable quitting your corporate job? Was there a time when you were just like, “This is it, I know I’m ready,” or did you just make a leap?

Matt Faircloth (05:43):
Well, my wife and I made a strategy about it. The reason why I was able to quit my job was because my wife and I strategically approached that conversation and decided that we would do it as soon as we got married, we would live off of her salary, and we made a strategic effort to live our means. So the first home that we want together was way under what we could afford. It was just half what we could afford given our two salaries. But because of that, it enabled us to afford it just on her salary. And she did okay. She wasn’t, like, making over 100,000 a year, we were living okay off of her salary, but that enabled me to quit my job so that I could go and explore the real estate investing spheres.

Matt Faircloth (06:24):
I probably would have approached it with a better plan than I did back then because I didn’t have that much of a plan. I just figured it out and didn’t have much of a mentor, just figured things out as I went through it, but that’s how we did it. And I think that there are only a few ways you can quit your job to invest. You can either scrape and claw your way up and invest in side hustle real estate until it makes enough money to where you can quit your job and you can make enough income coming from real estate to where you can quit. I think that’s a unicorn, and I know very few people that have actually done that. Most people take the leap, or they do the second, they just quit like I did, and then figured it out.

Matt Faircloth (06:59):
You can live off your spouse, as I did. The third way is you can get yourself into a profession that is similar enough to real estate that you can do some real estate investing on the side while you’re working your center profession but the two are so intertangled that you’re doing both. An example is being a realtor, that if you’re a realtor, you could spend some of your time running around selling properties to people or doing open houses, doing showings, but why you’re out doing that, maybe you go look at a few rentals, maybe you collect a rent check or two, maybe you do a showing. The landlord realtor is something that I think that a lot of people could use as a transition point to quit their jobs.

Matt Faircloth (07:39):
So, but I’ve rarely seen that the what people think as a way to do it, which is to make enough cash flow, from where you’ll sit on the side to the point that you make enough cash flow, “Okay, now I can quit.”

Robert Leonard (07:48):
Why do you think that that isn’t a good strategy, because that’s probably the most common thing that I hear? When people talk about financial freedom, that’s the strategy that I hear a lot of people talk about, just stay at your corporate job, buy as many units as you need to until you have enough cash flow. So why might that be a bad strategy?

Matt Faircloth (08:03):
If they’re super diligent about it, but cashflow tends to increase lifestyle, and then it can become tempting that if you’re making 1,000 a month in cashflow from three rentals, you’re like, “You know what, I do deserve a Tesla. You’re right about that. And maybe I could go on more lavish vacations now while I’ve got this money coming in and everything like that.” So if you are diligent about it and if you are disciplined with the money that’s coming in, then you can get there, but yet again, I know very few people that can get to that point, because I can tell you that, let’s just say for a number’s sake, that the number of rentals you need, a typical rental property makes some more between 200 to $300 a month.

Matt Faircloth (08:39):
So if you want to make 100 grand a year or even 10,000 a month on your rental property business, you can live a pretty good life on that these days. So if that’s your target for income, then you need to have around 30 units, just at $300 a month per unit. Now, maybe you can catch a unicorn and get a few properties that are making $500 a door, but for the most part, it’s going to be between two and 300 bucks, is what your cash was going to be per door, including maintenance, CapEx, all those things. So if that’s the case, then you need to have 30 units to supplement $100,000 a year income.

Matt Faircloth (09:11):
I can tell you that 30 units are a ton of rentals, and even if you’ve got a property manager, it’s going to pull a lot of your time to run that portfolio. I know no one that owns 30 units, 100% passive that just kicks back in cash checks. The myth of real estate investing of with zero work involved, unless you’re a true passive investor, like Kiyosaki’s Cashflow quadrant, if you read that. And if you’re truly in the I quadrant where everyone else is doing the work, you’re investing in syndications, you’re investing with a lot of people that are doing the doing and you’ve got no liabilities and obligations to the company. Yeah, maybe you can get there through an I, but you’re not going to make $300 a month on true I quadrant only investments.

Matt Faircloth (09:52):
If you’re owning rental property direct, you’re going to need to do something. You need to take some time out to go meet with your property manager. And that time that it’s going to take for you to interject into the business will start to interfere with your full-time job. And again, this is just my prediction, you’re probably going to get lots of people on your podcast that are going to come to you and say, “Well, I did it. I did it.” I’d love to hear about that because I’m not saying it can’t be done, I’m saying it’s an uphill battle. It’s a challenge because 20, 30 units can tend to pull down a lot of time.

Robert Leonard (10:20):
I love what you said because I think that’s such a good piece of almost humbling advice. I think people need to hear because on a lot of podcasts, people talk about how you can just continue to accumulate units until you reach financial freedom then you can quit your job, that’s what everybody’s going for. But when you really look at it realistically, everything you said is 100% true, and I agree with, and I think the lifestyle creep is such an important piece of it. And for me, I work a corporate job now, but I own some rentals. What I’ve done to try and combat that is I’ve never taken a dollar from the rental properties yet. Everything stays in the business.

Matt Faircloth (10:53):
It’s discipline.

Robert Leonard (10:54):
It’s not even coming to me, so I don’t even see it, so my lifestyle is not increasing at all. So people listening to the show, if you’re doing something similar, you can try and do that.

Matt Faircloth (11:01):
And let me add one more thing here, Robert, in that, if you’ve got either the spouse that’s working and the spouse that quits and does the real estate thing full-time or you find yourself a career that’s intertwined enough with real estate investing that you can do both, you will accelerate your growth faster. If you’re going to take a chunk of your paycheck every year and put it towards rental property investing, it might take you somewhere around five to 10 years to get those 30 units in that’s going to make you $10,000 a month. If you quit your job early and you put your full effort, your full time into accumulating that amount of units, you will get there faster.

Matt Faircloth (11:38):
There are just no bones about it, even if you’re not putting all your money into it, even if you’re doing some of the techniques that are in my book or some of the things that you hear about on BiggerPockets or whatever, like the BRRR strategy and just recycling money over and over again, you’ll hit that goal faster. I’m not out there preaching like, “Hey, you all should all quit your jobs,” but just to understand that if you do, you can implement a business plan that’ll kick in much faster.

Robert Leonard (12:02):
And the component about this that we’re not even talking about yet is taxes and healthcare. You get 30 units and now you have 10,000 a month coming in, but you haven’t even considered you’re going to lose… I know of course, real estate is very tax-advantaged, so you’ll have some benefits there, but you’re still going to probably have some taxes due and then healthcare, maybe you have your spouse that you can go on their healthcare, but if you don’t, if you’re single, then you have to pay health care yourself, and that’s a huge expense.

Matt Faircloth (12:26):
Absolutely. I’ve actually had conversations with people about the need that the real estate investing world needs healthcare. And I think that again, I got enough on my plate that I don’t need to do that, but that’s a pitch to your audience that if somebody wanted to provide the amenities that those with jobs have to the real estate investing world, I think that you would create a really great bridge. The healthcare and 401(k) are two examples that I can think of. So retirement accounts, I know people say, “Oh, my real estate is my retirement account,” but we probably should have some diversification and everything like that. But I also firmly believe that there’s got to be an outlet for providing healthcare to folks in our industry because I know plenty of people that haven’t quit their job yet that hate what they do, that have enough passive coming from other real estate ventures or are completely capable to build out their real estate ventures but won’t quit because of healthcare.

Robert Leonard (13:16):
Yeah. Healthcare is so expensive.

Matt Faircloth (13:18):
Yeah, can be.

Robert Leonard (13:19):
It seems expensive when you’re just paying your portion, and a lot of times the employers come in a good chunk of that anyway. So when you consider that, it’s a big expense.

Matt Faircloth (13:28):
Yeah. Well, and if you got kids, you could get yourself as an individual catastrophic insurance that God forbid, you wrap yourself around a tree or something like that. Nobody’s going to put catastrophic on their children. You want your kids to have the whole shooting match, dental, vision, the whole thing. And that’s going to cost you. Even if the parents don’t have as good of insurance as the kids too, you want to take care of your family. It’s one thing for you to make sacrifices, but it’s another thing to ask your kids to do the same thing for their health. Nobody wants to do that. So I think it’s an opportunity, a business opportunity for somebody to step into.

Robert Leonard (13:59):
So if anyone listening to the show today has the means to be able to do that, sounds like you have a multi-million dollar business idea here that you can go run with.

Matt Faircloth (14:07):
Come pick my brain. Come pick my brain. I got a ton more I can tell you about how to structure it. So call me up, I’ll tell you my whole idea.

Robert Leonard (14:13):
Before we dive into more about your book, Raising Private Capital, I get a lot of questions about raising private capital, so I definitely want to talk about that. The last piece I want to talk about on quitting your job for real estate is how getting loans changes when you leave your job. When you have W2 income, it’s pretty easy to get a loan. You could go to a bank and you have W2 income, that’s like gold to them-

Matt Faircloth (14:35):
Sure, what do you need?

Robert Leonard (14:35):
… where if you’re self-employed in real estate, it’s hard.

Matt Faircloth (14:39):
It can be. There’s a hurdle that once you build up to a point in real estate investing, it gets easier again. Because then they get, “Okay, this guy’s for real. This woman’s for real. They know what they’re doing, they’re not going anywhere. They’ve got to be in a portfolio. They’ve proven themselves.” So once you invest for a while, the money gets easier. I’m going to get to the point that I’m at, it’s not that hard to get money. They’re not like, oh, W2 job to get the loan to buy that apartment building. It’s not like that anymore. But when you first quit, it can be very difficult for me. What we did was, my wife still had a day job. And so she had a W2 income. So I ended up having to bring my wife as a guarantor on almost everything that I was doing, which was fine at that point.

Matt Faircloth (15:18):
So she had to take a day off, go to closing, come back home. “Thanks, honey.” If you are the self-employed professional, you’re not married, you might have to get out there and find yourself either two different things, find yourself a loan sponsor, somebody with a good W2 job that’s willing to co-sign loans for you, or you might have to go and use somewhat more expensive debt like asset-based loans that come in around seven, eight, 9% and not the 4% that we get to enjoy with the W2 bank loan.

Robert Leonard (15:50):
Yeah. When you first quit, you’re going to have a very steep time getting those loans, but then like you said, “Once you hit a tipping point, it’ll eventually come back down and it gets easy again.”

Matt Faircloth (15:58):
You plateau. And a lot of that comes from using the same lender over and over. It also has to do with being okay getting a recourse loan. Honestly, people make a big deal out of recourse, like, “Oh, what if they come back?” You know what, if you don’t believe in your real estate to the point where you’re willing to sign yourself up on it on a recourse loan, I question that. A lot of my loans at our size are non-recourse now, the size of our company, but I’ve never minded signing off on a recourse. Going back to my point, if you use small community banks for your loan, they’ll likely take a risk on you on the first or second deal. Maybe you’ve got to bring in a loan sponsor, but the more business you give them, the more they’re willing to look the other way.

Matt Faircloth (16:34):
And so I don’t recommend going to a large outfit like the Wells Fargos or PNCs the world, but if you’re investing in a certain community, in a certain town, find a bank that’s right there around that property, in that town, that doesn’t have that many branches, just a few, and talk to them about lending. And then agree to put all the security deposits with them, agree to put the company operating account with them, maybe even move your personal over to them. And then they’ll probably require an arm and a leg and a firstborn child for your first mortgage, but then for your second, third, and fourth, it gets a lot easier because they rely on you and you rely on them at that point.

Robert Leonard (17:10):
Did it get here easier when you got to the size that you were going into commercial loans rather than the residential stuff?

Matt Faircloth (17:15):
Oh yeah. We’re in stuff now, I don’t remember, we just did a loan recently, I don’t think they asked for our tax returns. I don’t think so. They might have enough forgot about it, but it’s definitely not a big thing where it’s like, “Oh, we’ve got to run your credit score. We need to see three months’ worth of personal bank statements,” and whatever. They didn’t look at any of that stuff, all they really care about at that level for larger stuff, our last purchase was, one of my students bought a 48 unit and that was like 1.8 million. Before that, we bought a 220 unit that was 7.7 million. Those were like the easiest transactions ever, because all they care about is the property, that’s it.

Matt Faircloth (17:51):
And don’t get me wrong, man, if they got recourse, if that loan doesn’t perform, they will gladly come and take that apartment building from you. And they’ve got plenty of tentacles in the loan that now enable them to do that very quickly if they want to. So believe me, they have plenty of recourse, but they don’t need my house and my car and my personal bank accounts to make themselves whole, they got that real estate, which is that’s really what makes them whole.

Robert Leonard (18:14):
In the grand scheme of things, your car, even if it’s an expensive car, it’s nothing on-

Matt Faircloth (18:18):
I’ve got a nice car, but it’s nowhere near going to fill in the gap on a $7.7 million apartment building.

Robert Leonard (18:25):
Let’s transition and talk about private capital. I know you wrote an entire book about it. I’m a big fan of it. I have it on my bookshelf at home.

Matt Faircloth (18:31):
Thank you. Thank you. Thank you.

Robert Leonard (18:32):
So for those who don’t know, what is private capital?

Matt Faircloth (18:36):
So private capital is just cash to make things happen. It’s just money to inject into your business. It’s just resources and everything like that. So in Raising Private Capital, the book that I wrote with BiggerPockets, the book could also be titled, Everyone Knows People With Money because that’s what the book is really about. It’s about how to shake your own network, because some people think that they need to go to like website raisingprivatecapital.com or they need to go to some website or to join a country club or whatever, to go and find private money, but what they don’t realize, or they may not realize is that private money is literally all around us. And there’s so much money looking for a home to place itself in deals that could be in a house, in an investment deal, in an apartment building, in a fix and flip, whatever it may be.

Matt Faircloth (19:20):
So my book, Raising Private Capital talks about where to look for that money, how to find it, how to talk to it, how to structure it, how to cashflow that private money out of your own network. And most importantly, how to exit from the deal once you’re done.

Robert Leonard (19:32):
Why did you want to write this book in the first place?

Matt Faircloth (19:35):
Well, it’s something that I stumbled into of raising private capital. My first private capital deal was just, aside from friends and immediate family, my immediate family was my initial investors, but beyond that, my first one was somebody that my wife went to college with, and she was just getting reconnected, talking to him on the phone, and just mentioned stuff she was up to, and she was just like, “Oh, my husband’s investing in real estate.” And he said, “I sure wish I could invest in real estate too, but I just don’t have the time.” And she was like, “You should talk to my husband.” And so we did. And he was just like, “Listen, I got 50 grand sitting in my savings account. I work 80 hours a week and I love what I do. I’m not trying to quit my job, but I need to put this money to work somewhere, I just want to do something with it.”

Matt Faircloth (20:14):
And so he gave me 50 grand and we did a deal. And then he told his friends about it, and then those friends told their friends about it. And then it just snowballed from there. So I decided to write the book because it made me realize that if I can do this thing, I’m not that special, my mother thinks I’m special, but that’s it. And nobody that sees me operate should think that I’m no different than them, they should realize this if the book says anything, is that you can do this too. And so I wrote the book because I wanted to help real estate investors realize that there’s a lot of money around them. And also, I believe that Wall Street should not be the only place that America builds their wealth.

Matt Faircloth (20:51):
I say that firmly, I love financial planner friends of mine, God bless you, guys, but I don’t believe that financial planners that are putting money on the roulette wheel of Wall Street should be the only source of investing for people of wealth building and of just building our retirement futures. That real estate investors actually can act as alternative investment advisors as well to help people put money to work in our businesses, while you also invest in Wall Street too. Yeah, that’s fine. But also maybe you should consider diversifying into real estate and real estate investors can step in that role and be those financial planners for people.

Robert Leonard (21:23):
I’m a big stock investor myself, that’s my background. I was only a stock investor until I got into real estate. And just like you said, I think there’s room for both in people’s portfolios. Some people want to be more heavily weighted towards real estate and that’s fine, some want to be a little bit more in stocks, but still diversified in real estate. So I think there’s room in people’s portfolio-

Matt Faircloth (21:39):
You’ve got to do both. You’ve got to do both.

Robert Leonard (21:40):
Yeah, exactly.

Matt Faircloth (21:41):
They’re both, like, 100% non-related. And true diversification is not like I own some oil and gas stocks and I also own some food stocks and I also own some transportation stocks, you’re all in the stock markets. That’s kind of diversification, but not really. If you want to be in a completely different asset class, then you’ve got to be in something that’s not going to be directly correlated to each other, because it’s not like if Apple stock goes down, Microsoft’s not going to go down too, they both have temper probably going to see a hit if one goes down. So you’re really not diversified.

Robert Leonard (22:10):
Yeah. And we’re recording this on February 28th and this week in the news, the biggest thing is the coronavirus and the whole stock market is plummeting.

Matt Faircloth (22:20):
I haven’t checked the market today. Is it down again?

Robert Leonard (22:21):
1,200 points, or a lot. This morning, at least. And that was before I left my hotel room, but who knows what it’s doing now, but it was down a lot, but to your point, the whole stock market is down. My position is in Apple, Microsoft, Amazon, these are all down.

Matt Faircloth (22:34):
It’s an interesting conversation, Robert. So let’s run with that for a second because as the stock investor, you can make good picks, but there’s no way that you could have predicted that this was going to happen two months ago. Now, maybe you saw coming down broadway a couple of weeks ago, it was this coronavirus thing that started to get out of control and we weren’t sure where it was going to go, and it seems like we really couldn’t contain it. And all of a sudden, people all have run a cruise ship is showing up effective with it. And cities and towns in Italy are getting shut down and stuff. It’s starting to get a little bit like, “Oh man, this thing’s getting out of control.”

Matt Faircloth (23:06):
So maybe you saw it coming a week ago, but six months ago, no idea, there’s really no idea what the stock market’s going to do. Now, in real estate, I can’t guarantee my tenants are going to pay the rent, but I’ll tell you what, I have ramifications if they do. If Microsoft misses their quarterly projections, I can’t go take the CEO’s house. But if my tenants don’t pay the rent, I can remove them from the property, I can put other people in. If I loaned somebody money and put a lien on that property, they don’t pay that note, I can come to take that property. Real estate gives more collateral and ramifications than most other investments do.

Robert Leonard (23:44):
And of course, I’m saying all of this, I’m a big fan of stock investing. I love picking individual stocks-

Matt Faircloth (23:48):
Good time to buy actually.

Robert Leonard (23:49):
It is, I’ve been buying a lot.

Matt Faircloth (23:50):
It’s interesting slipping like this, and finally, it has been tough to buy stocks lately. Now we’re probably down 15% since the peak in that. So it’s actually a good time to buy. Believe me, I agree with you, but I just don’t think that we should all be in one bucket.

Robert Leonard (24:05):
Agreed. And I bought a lot this week to your point, but I think the other piece of real estate that’s awesome is what makes stock investing so hard is you see things plummet this week like they have and your psychological side of your investing, your emotions take over control and you can just click a button on the computer and sell all your stocks. And that’s not the right way to do it. With real estate, all my rentals, I don’t know, maybe they went down a little bit in value, maybe they didn’t, I don’t know. I can’t tell, my cash flow’s still coming in. And so it takes away that whole emotional, psychological component of it. And I think that is so huge.

Matt Faircloth (24:37):
It is. Let’s run with that for a second because I heard, you know who Robert Holmes is, right?

Robert Leonard (24:42):
He’s real similar, the real estate radio guy?

Matt Faircloth (24:44):
I heard him speak at a conference and he brought up something, he’s actually a brilliant dude. And he brought up something that I thought was great, it’s just the illiquidity of real estate is one of its best assets. And a lot of people complain about the illiquidity of real estate. They’re like, “Oh, this thing’s crashing and I can’t sell. I really want to sell this property and nobody’s buying it.” Or it’s really tough to refinance, it just takes forever to do everything in real estate, it’s a slow-moving beast. It takes forever to refi, it takes forever to sell, sometimes it takes a long time to buy. But because of that, because of the illiquidity of real estate, we have a fairly stable product that, it can’t just go to zero. It can’t just get cut in half.

Matt Faircloth (25:22):
Now, I don’t think this would happen, but Microsoft stock could drop to half of what it is today because it’s a liquid asset. People can just go online and sell, there it goes, it’s down.” And that’s one of real estates in some ways, the detriment, and people like you and I have to grind our teeth a little bit about how long it takes real estate to move. We have to be a little more patient than we’re used to being with it. But because of that, it actually gives it a lot more stability because people cannot sell real estate on emotion or at least on short-term emotions. You can’t just say, “That’s it, I’ll sell it.” It takes a while to get things around, right?

Robert Leonard (25:55):
Exactly. And if you decide to sell real estate, it’s going to be 30 to 60 days before you sell it unless you get a cash buyer that’s going to close tomorrow, but that’s unlikely. And I think there are pros and cons to the liquidity of the stocks, and there are also pros and cons to the illiquidity of real estate. It’s funny, you talk to a lot of my friends or people that I talk to in the real estate stock space that are only in stocks, they always complain about the illiquidity of risk. And I say exactly what you just said, is I see it as a benefit. It takes out the emotion. If you ask anybody that studies behavioral psychology or behavioral finance, they’ll say the hardest part of investing is behavior, human behavior, and real estate takes that

Matt Faircloth (26:32):
It’s interesting, perhaps one thing we could sum it up by saying that what makes stocks great is it’s easy to get in. What makes stocks stink, is it’s easy to get out. And that’s the opposite thing about real estate is it’s actually hard to get into real estate, which stinks, but it’s also hard to get out of real estate once you’re in it. And so that stabilizes the market in a lot of ways.

Robert Leonard (26:54):
Very, very well said. And you said Microsoft could cut in half, it very well could.

Matt Faircloth (26:59):
True. It has before

Robert Leonard (27:00):
It has before. And it probably will again in the future. And so will a lot of other stocks, but what’s good about real estate, and of course, a lot of people listening to the show probably think, “oh, well, what about 2008? That’s different. Those properties weren’t cash-flowing. Those weren’t doing certain things, they weren’t checking certain boxes. If you have a good cash flowing rental property, and that cash flow keeps coming in, you’re able to maintain that asset, even if the asset value drops, even if your rental drops 50% in value, your cash flow, as long as you’re holding that property, you’re going to be good.

Matt Faircloth (27:29):
I would come back on somebody that told me like, “Well, look what happened in ’08, that could happen again.” Well, yeah, listen, the reason why ’08 happened, and by the way, I was around, I was investing in ’08, it was not a real estate issue, it was Wall Street issue that had to do with finance. It had to do with how real estate finance ties into mortgage-backed securities and how it ties into Wall Street-related products. That is what drove the crash, because of those products where were sold, probably more rampantly than they should have been, weapons of mass destruction, is what a lot of people call them, because they were so rampantly, they forced lenders to have less and less scrutiny on buyers.

Matt Faircloth (28:06):
I remember when I was buying property, it was literally like, “Do you have a heartbeat? Do you have a reasonable job? Can you sign your own name? At that point, we’ll give you a loan, because the lender, think about how looney-tunes this is, the lender would state what your income was. They would say, “I’m going to put you down you’re making 250,000 a year.” And it’s like, “But I don’t make that.” “Yeah, but you need that for the loan. I’m going to state that you’re worth $2 million, stated income, stated assets.” They would fill it out for you, and then you would just sign it at the bottom. Think about how lack of checks and balances that was, but because it was such hunger for loans on Wall Street, that these lenders were allowed to do these things so they could produce more product to get sold on Wall Street.

Robert Leonard (28:46):
Yeah. We had a great guest on my other show, Millennial Investing, Gabriel Hamel.

Matt Faircloth (28:49):
I know him. I know him very well.

Robert Leonard (28:50):
And he said very well. And he said he bought his first rental property in 2007 with zero money down. And then a little bit after that, he bought his second rental with 5% down. And so that wasn’t too bad, he had the cash flow from his first property, but then his third rental, things had changed and quickly, and now he needed 20%, 25%. The banks had come to their wits and he couldn’t do it anymore. But to your point, he got his first rental with nothing down.

Matt Faircloth (29:16):
Check this out. I bought a small apartment building on 5% down. This was pre-crash, bought a small apartment building on 5% town with a first mortgage and a second mortgage. And the first mortgage, you might even know what a second mortgage is, the second mortgage is something that you can… It was so common back then, you get 80/20. You would get 80% first, 20% second. So I got an 80% first and a 15% second. And the 80% first was a negative amortization mortgage. What that means is that if your monthly payments are $1,000 a month, you only have to write the bank a check for $600 because that 400 bucks that you owed them would just get rolled onto the principal of the loan. And you look at it like, “Oh, that’s only five grand a year.” And the property is going up by 20,000 a year.

Matt Faircloth (30:00):
And in that economy, it was, you’re actually winning for an increasing economy like that. This is like, “Oh, I’m only increasing my debt by five grand. My property value is going up by 20.” That made sense in an up economy. But that’s just the looney-tune world that we lived in. And now you and I look at that and like, “For real, so you weren’t even servicing your entire debt. Not even amortization of paying it off, you were increasing your debt.” But it made sense. A lot of these things rightfully so are not around anymore, you can’t do these kinds of things. It was good for cash flow, but it was awful for long-term wealth planning.

Robert Leonard (30:33):
Yeah. And that example, you have the eighth wonder of the world, compound interest working against you. Now, you have your interests growing and growing and growing on themselves. That is not what you want. You want it to go the other way.

Matt Faircloth (30:42):
Yeah. I know.

Robert Leonard (30:45):
I’m glad that a lot of those products on around today, but as a relatively new real estate investor and someone who I like to think I do it right, I wish there was no money down loan so that I could take advantage of those products and use them appropriately to grow my business, but overall, I’m glad they’re gone.

Matt Faircloth (31:00):
I got to tell you, Robert, is that we do a lot no money down loans with private money in that. So private money, what’s great about private money, is first of all, aside from it being a win-win, that you’re helping people increase their wealth. I say like, “Listen, I’ll help you increase your wealth while I build my business.” That’s how I pitch my private lenders. But you can also sit down with them negotiate, like try sitting down with a bank and say, “Hey, listen, here’s the deal. I’m going to borrow 90% of my property value from you, my purchase price. And you’re going to loan me 100% of construction. You can give it all to me upfront. And I’m also, I get another idea. I’m also not going to make monthly payments during the life of the loan, because I’m going to fix and flip this property.

Matt Faircloth (31:36):
“I’m buying it for 100. It’s going to be worth 250 when I’m done. Look at all that spread that you’re going to make. Look at all that spread that we have of protection that you have on the asset. So it’s okay, I’m just not going to make monthly payments during construction of the loan, I’m just going to pay you the entire lump sum interest payment once it’s done.” Most private lenders are okay with that. Try to get a bank to say okay to that, forget it. They’d laugh you out of the door. So what’s great about private money is it enables you to do more low and no money down stuff. It enables you to get just creative.

Matt Faircloth (32:08):
And if you’re doing a flip and you want to bring your lender in on the backend on profit, you can do that, it’s going to the joint venture. My book talks about that too. And that’s win-win also, but there’s a lot of different, cool arrangements you can do with private money.

Robert Leonard (32:20):
Not only would the banks more or less laugh you out of the office, they probably wouldn’t even understand what you were talking about. I don’t mean that disrespectfully in any way, it’s just they don’t know creative financing strategies unless they’re a real estate investor. They probably wouldn’t even wrap their head around what you’re doing.

Matt Faircloth (32:32):
I’ll give it to you even further, the banks are not lending you their money, the banks are lending you someone else’s money that is lending it to them on a margin. So almost all banks, including hard money lenders they’re not lending their own cashout. A private money lender is lending their own personal cash. They can put their money into your deal, whether that’s equity or in debt. They’re way more in control of it. They’re not beholden to anyone else except for themselves. And that’s why they really hold the purse strings. Banks don’t really hold the purse strings. They’re beholden to other institutions behind them that they’re borrowing the money from, the prime or whatever it is.

Matt Faircloth (33:09):
And so banks really aren’t in control, they’re just money brokers, they’re not actually money providers, they’re just selling money to you that’s really someone else’s money. A private investor, it’s their direct cash. It’s a very different conversation. And if you think about it that way, that a bank is just selling money under their terms, but a private money lender can invest under negotiation that you can do with them, really opens up your eyes.

Robert Leonard (33:32):
Yeah, exactly. Most traditional banks are selling you what they call agency debt, which means sold to the government, Freddie, or Freddie Mac, and they have to sell you and you have to conform to exactly what they want in a loan so that they can sell it, because if you don’t meet their requirements, then they can’t sell it to the government, then they get stuck with it on their books, and then they don’t want that. So you have to fit to exactly what they’re doing. But if you go to a private money lender, you could be creative, or even if you go to a portfolio lender, and that means the bank is lending their own money, they can get a little more creative. They’re not as creative as a private lender, but they can get a little more creative.

Matt Faircloth (34:05):
Hard money lenders, don’t get me wrong, can get a little bit creative with their loans, but they’re nowhere near as creative as your uncle Harry will be able to get with his money, or the person you went to high school with, or your next-door neighbor, or somebody that goes to your church, or somebody with the high school with. They really just sees that there’s got to be something else out there for them to build their wealth. And if you explain this to them and be an educator first and show them how their money really can’t get put to work through real estate and explain compounding interest to them, then you can have a big advocate.

Robert Leonard (34:34):
You mentioned that, going back to raising private capital, one of your first ones, you said, was with friends and family?

Matt Faircloth (34:39):
Yeah.

Robert Leonard (34:39):
If someone doesn’t have friends and family that they can reach out to, which you’d probably argue that they do-

Matt Faircloth (34:44):
I would absolutely argue that.

Robert Leonard (34:46):
But let’s assume they don’t-

Matt Faircloth (34:48):
I have so many people tell me that, like, “I don’t know anybody…” People automatically skirt it and go, “I don’t know anybody with money. Nobody I know has money.” Okay. If that’s the case, I know you have a question there, so I’ll let you get to it, but I have to say that if you truly know no one with money, none of your friends, none of your family members, no one, and I think what you’re really saying in that circumstances, you’re saying, you don’t want to ask them and you’re not comfortable asking them for money. Own that, say that, say that out loud. Look yourself in the mirror and say that and then examine why you’re not comfortable saying that. Is it because you don’t believe in yourself, maybe that’s what it is. And that’s okay. But then start believing in yourself, start believing in your business.

Matt Faircloth (35:24):
If you truly, truly, truly know no one with money, and it’s not that you don’t want to ask them, it’s just that they don’t have it, then you’re hanging out with the wrong people. And that you don’t need a new family. You just maybe need a new group of friends, getting some new circles, because whoever you’re surrounding yourself with, you become who you surround yourself with. Have you heard that? So if you become who you’re surrounding yourself with, and nobody you hang out with has any money, then you’re becoming that. So you should just surround yourself with people that are turning themselves into something great.

Matt Faircloth (35:50):
Let’s go to your question which was, what if you talk to somebody who says they don’t know anybody. That’s my counter. So you were going to say like, so what should they do if they really don’t have anybody in their network? That’s why social media is amazing. That’s why I have a YouTube channel that’s thriving is because we talk a lot about real estate. Now, if you have no money for yourself, then you might need to get yourself into some sort of profession or some sort of a circle where there is something to talk about. So maybe become a realtor and become the investor’s realtor, and then start up a YouTube channel on how awesome investing is wherever you live, then become the thought leader of that space.

Matt Faircloth (36:21):
People will come to you looking to invest because you’re that person. Facebook, YouTube, LinkedIn, Instagram, these are all outlets that you can have and build an enormous brand for yourself around those things. You don’t need any family or friends to invest with you. I still think that you should look at family and friends to invest. I just firmly believe, why not help the people you care about the most get to their financial goals. But if you’re not comfortable with it, that’s okay, you can leverage social media by putting yourself out there.

Robert Leonard (36:47):
I love what you said because if you’re not comfortable with it, then that’s okay. I can sympathize with that, I can understand that, and I can say, “Okay, maybe you’re not comfortable with it, and that’s one thing.” Then we can go find X, Y, and Z find different routes to go about it. But if you haven’t asked, then you’re probably leaving a lot of opportunities out there. And I agree with you 100% because, for me, I didn’t have any social media before I started the podcast, nothing. And then when I started the podcast, I launched so much to social media and I started to post about how I’m doing real estate. And then these people started coming out of the woods like, “Oh, hey, I’m interested in real estate.”

Robert Leonard (37:20):
My uncle last weekend said to me, “Hey, I have 100 grand I want to invest.” I’m like, “What? I didn’t know you had that money. You drive a normal car, you do this, I didn’t know you had any money.” A kid from high school, I didn’t know what he was doing with his life. He said, “Hey, I have all this money, I want to invest.”

Matt Faircloth (37:33):
Robert, it’s the people with the nice cars, they don’t have money, by the way. And I tell that to your audience too– the people driving BMWs and Lamborghini’s and stuff like that are the people that are broken in another level. Your uncle that’s got 100 grand is probably driving a seven-year-old Chevy pickup or something like that. That’s one of the reasons why he has 100 grand is because he knows to live below his means.

Robert Leonard (37:54):
Absolutely. And you said you were living below your means and that’s how you were able to quit your job. But, you don’t know, if you’re taking it at face value and you don’t ask people, you don’t know who has money and who doesn’t. And I guess that’s my point is, I think you’re probably dead on those people in their network, even if you don’t think you do, you probably have someone that has money. So for someone who is able to find capital, whether it’s through friends, family, whoever it may be, how do they structure that deal?

Matt Faircloth (38:17):
It depends on the deal. So you can either borrow the money or you can take it in as equity. If you’re borrowing the money, then you’re just taking it in as a mortgage, and a note, pedal company would file it for you. It’s pretty straightforward in that. The only negotiation points are what’s the interest rate? What are the payment terms? How long is the mortgage good for? Those kinds of things. So loans are pretty straightforward. I highly recommend for people looking to get into private money, you start with loans because loans are just very straightforward. And what’s great about a private loan is you have 100% of the property control. You don’t have a partner.

Matt Faircloth (38:50):
If you make 30,000, 50,000, whatever on a fix and flip, and you just have a lender on the deal, that 50,000 after you pay your lender is all yours. Whereas if you’re an equity partner, you have to get up to just whatever chop up it’s going to be. So you’re diluted very quickly giving away equity. That said, giving away equity allows us to get into way larger projects. So we raise capital for apartment buildings in that, and we’re selling off equity to get into those apartment building deals. The equity is just ownership, it’s long-term ownership alongside you. It’s really having someone partner with you as a money partner on your deal.

Robert Leonard (39:22):
Even if you’re giving away some equity-like you said, having a smaller percentage of more deals is more beneficial than having more equity of less deals.

Matt Faircloth (39:32):
It’s a smaller chunk of a way larger pie. Again, 48 we closed last month, 222 units, we closed last year, I don’t believe I would have been able to take those deals down by myself in that, but because I have equity investors that believe in us, I’m able to structure win-win deals with them. So we get a slice, they get a slice, it all works out.

Robert Leonard (39:51):
Yeah. And I think it’s Mark Cuban says on Shark Tank all the time, he’d rather have a small piece of watermelon than the whole grape. It’s the same thing. It illustrates the point, exactly. Matt, as we wrap up the show, what is one thing that you know now that you wish you had known before you got started in real estate?

Matt Faircloth (40:09):
Oh boy. I just sometimes wish I could just pull a time machine and go back and tell myself when I first got started to just focus. And I was listening to my good friend, Josh Dorkin interview Brandon Turner on his new podcast. And Josh was smart enough to focus when he started BiggerPockets. And he said no more than he said yes. I said yes more than I said no when I first got started, “Hey Matt, you want to look at this fix and flip?” Sure. “Hey, Matt, you want to go look at this piece of land? Sure. “Hey Matt, you want to go look at this trip center?” Absolutely. “Hey Matt, you want to go look at this apartment building? Yes, I do. And so we chased a lot of shiny nickels.

Matt Faircloth (40:40):
And I think that until we realized that we were doing that, and until we realized that it was time to just clean our plate and get ourselves out of everything, but really what our core was, it was when we started to grow. And so my biggest advice to myself 10, 15 years ago is to focus on one asset class, stay in my lane and own that, help become 100% expert at it, and then you can change into something else.

Robert Leonard (41:02):
I love that advice, and that’s something I struggle with just like you did.

Matt Faircloth (41:05):
There’s a great big world out there, man. There’s a lot of opportunities, a lot of things that sound good on paper.

Robert Leonard (41:10):
And if you’re entrepreneurial, which a lot of real estate people are, you’re going to want to do everything. I do the podcast and work real estate, all kinds of different things, so I’m always wanting to do different things, and it’s hard to say no. And I recently had a guest on the show, Brad Dantonio, and he was so focused. He only buys single-family properties that are 1,600 square feet with a certain number of bedrooms, with a certain layout, in a certain neighborhood, in a certain city. And that’s all he’ll buy.

Matt Faircloth (41:35):
And he’ll end up walking out with probably 50 or 60 of them. And he probably knows those properties at the back of his hand, knows where everything is, knows all the different structures, and he probably says no more than he says yes, but it’s a good way to scale and not have to know too much because you just know that one thing that you’re investing in like the back of your hand.

Robert Leonard (41:53):
He knows them well, he knows what they’ll rent for, and he knows the price. If it’s a good price, he’ll buy it. If not, he knows right away and he doesn’t have to spend any time on it. So it focuses on you. Just one of my big goals for 2020. So I think that’s great advice. Matt, where can the audience go to learn more about you and connect with you further?

Matt Faircloth (42:08):
Derosagroup.com is where everything there is to know about us exists. There’s a link over to my YouTube page there, there’s a link to my wife’s podcast called The Real Estate InvestHER Show, which is the journey of the female real estate investor. There are some videos, there’s a new program we launched called DeRosa Insiders. All that is there on our website at derosagroup.com, D-E-R-O-S-A, group, G-R-O-U-P.com.

Robert Leonard (42:31):
As I mentioned in the intro, we had Matt’s wife, Liz on the show just a few weeks ago, so if you’re interested in listening to that episode, be sure to go back and do that. And of course, as always, I’ll put links to Matt’s resources and other related materials in the show notes below of your favorite podcast player or at theinvestorspodcast.com/realestateinvesting. Matt, thanks so much for joining me. I really appreciate it.

Matt Faircloth (42:55):
Thank you, Robert. Great being here.

Robert Leonard (42:57):
All right guys. That’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (43:04):
Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decisions, consultant professional. This show is copyrighted by The Investor’s Podcast Network. Written permissions must be granted before syndication or rebroadcasting.