Why $50 Per Unit in Savings Is Worth $5 Million to Me

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0:00 Hello and welcome from New Hampshire. I
0:03 am here at the house of Matt the
0:05 lumberjack landlord. A huge inspiration
0:07 for me. I go to him whenever I get
0:09 stuck. While he may have a technically
0:11 smaller portfolio, he built his whole
0:13 business with no partners. He is worth
0:15 so many more times the net worth that
0:17 I've accumulated in real estate. And
0:19 he's done it over 25 years. And his
0:21 model is fantastic. If you guys haven't
0:23 followed the channel, uh absolutely do
0:24 so. But I get his studio today. So,
0:26 welcome. uh and in meeting with him over
0:28 the last three days and seeing his
0:30 portfolio, I have a phenomenal topic for
0:33 today. Uh if you've ever heard the term
0:35 you make money on the buy, it's still
0:37 true, but that's less than half the
0:39 equation. The buy is a thing that
0:40 happens one time and you do have to buy
0:42 right for your deal to work. That is
0:43 where you set the stage to make money,
0:46 but you really make money in your
0:47 operations. And here's where I see most
0:49 investors get stuck. They don't fix
0:51 their And I know this is a clean
0:53 channel. I rarely say it, but it is the
0:54 right term for this right here. I see
0:56 this happen often, especially when
0:58 people acquire a lot of real estate
0:59 fast, is they have vacancy issues, they
1:02 have operational issues, they become
1:03 really good at buying real estate and
1:04 they structure deals that honestly are
1:06 really good on paper. The problem is the
1:08 operations don't happen. So, they miss
1:10 projections. And I've seen deals all
1:11 over the state of Texas, Washington, all
1:14 over the country fall apart because of
1:15 the operational piece. And you go back
1:17 and look at the deal and those operators
1:19 are like, "Look at my assumptions fine.
1:21 I don't know what happened." It's like,
1:22 "Yes, yes you do. You didn't go back and
1:24 fix everything. You need to have a plan
1:26 to really operate your property, which
1:27 what we're going to talk about today,
1:29 because that's where you make all the
1:30 money. I'm also going to share the
1:31 biggest mistake that I made. Cody Davis
1:33 and I, we started this channel together.
1:35 We bought over a hundred units in our
1:37 first year partnering together. That was
1:39 stupid. And we've shared it all over
1:41 Bigger Pockets. There was a time where
1:43 we were getting millions of views on
1:45 every podcast because of all the buying
1:46 we're doing. And everyone thought Cody
1:48 and Christian are amazing and what
1:50 they're doing is so inspirational. I I
1:51 am here to tell you that was the wrong
1:54 move for our portfolio. Smarter move in
1:56 the first year buy 50 or less total
1:58 units. I'm a huge fan of buying bigger.
2:00 Get some 12plexes. Buy a 25plex. Buy a
2:03 50-unit building. Do one deal, but learn
2:05 your operations. Here's where we got
2:06 killed. I I believe this will save you a
2:08 ton of money if you just follow this
2:10 exact formula here. Uh this is what we
2:12 did wrong. I'll show you how to do it
2:13 right. What we did wrong, there was
2:15 vacancy. There was collections issues in
2:17 the 38 unit. There was maintenance
2:18 stuff. We hired contractors. We got the
2:20 work started and then we bought three
2:22 sideby-side duplexes. Still within the
2:24 range of okay, happy we did it. Then we
2:26 bought a 7plex. Then I bought a 12plex
2:28 and a sixplex and a 10plex and another
2:31 set of duplexes and another set of
2:33 triplexes. And then we did a whole bunch
2:35 of other transactions very shortly after
2:37 that. But we bought way too many units
2:39 in way too many LLC's way too fast. Here
2:41 are the things that you learn after you
2:42 buy your first deal. So there's a
2:44 concept called bottlenecks. And even if
2:45 you've heard this a billion times,
2:47 bottleneck, nothing can get through
2:50 anywhere else in your pipeline. If you
2:51 have a bottleneck here, if you don't fix
2:53 the bottleneck, your flow is limited
2:55 right there. Cody and I were limited by
2:57 four things. Number one, maintenance.
3:00 Projects were getting worked on, not
3:01 completed. So, we didn't have any
3:03 ability to occupy the units. So, income
3:06 while the projects were moving along,
3:07 income was not increasing, which means
3:09 we would never hit our projections. Two,
3:12 we were not monitoring the bills for the
3:14 contractors or bidding competitively
3:15 enough. Turns that should have taken us
3:17 $5,000 were costing us $20,000 and we
3:19 were too young and dumb to focus on that
3:21 because we were too busy buying good
3:22 deals. And to be fair, every deal we
3:24 bought was a good deal. The deals were
3:27 great. Our operations in our first year
3:30 absolutely sucked. Uh, problem number
3:32 three, we did not know how to do
3:34 accounting. To be fair, you don't have
3:35 an accounting problem until you buy the
3:37 real estate. We really should have just
3:38 slowed down, taken a year, done a year
3:40 of filing taxes, understood your
3:43 internal basis in an LLC, what type of
3:45 debt products mean what. We had never
3:47 gone through a full cycle of what does
3:49 it actually look like to file taxes on
3:51 this amount of income with this amount
3:53 of acquisition. Third, I structured
3:55 deals better than I did in that first
3:57 year because I've actually gone through
3:58 years of being partnered and navigating
4:01 deals. We should have just slowed down
4:03 just to learn. There were so many
4:05 structural things. Even that 38lex, we
4:08 could have made an extra $225,000
4:11 had we structured our partnership very
4:14 slightly differently. We put in a term
4:16 there that said we'll double their money
4:17 in 5 years. So, we have an option to buy
4:18 them out in the next 5 years for double
4:20 the money. We had a position where we
4:21 needed to refinance. We got a lot of
4:23 money out, but we refinanced at month 11
4:26 of owning that property. The option said
4:28 we have to double their money. So they
4:30 were expecting like a, you know, roughly
4:34 your money's compounding at like 18ish%
4:37 compounding. They're expecting a return
4:38 that looks like that to double your
4:40 money in 5 years. We doubled their money
4:42 in 11 months. They got over a 100%
4:45 annualized return. We effectively
4:47 borrowed the $300,000 down payment at
4:49 over 100% interest. That's what we did
4:52 effectively in our contract. I would not
4:54 do that today. the time value would have
4:56 been baked in where, hey, if we buy you
4:58 guys out super early, it's a different
4:59 price than if we buy you out later on.
5:01 These little things didn't find their
5:02 way into our contracts because we didn't
5:04 have the experience. So, am I saying
5:06 start small, buy a single family house?
5:08 No, absolutely not. You need to buy
5:09 bigger, you need to buy faster. A 12plex
5:10 isn't that hard to run. A 25lex isn't
5:12 that hard to run. I have not seen
5:14 mentees in multif family strategy. I
5:16 I've coached hundreds of people,
5:18 hundreds and hundreds and hundreds of
5:19 transactions. I have not seen anyone
5:21 struggle significantly
5:23 on any building until they start getting
5:25 to 60 units. That's the I've seen a few
5:27 60 units where it was a huge struggle.
5:29 They all made it through. They all made
5:30 money. But the learning curve, easy rule
5:33 in your first year when you are finding
5:35 success, you'll find that it's easy to
5:37 keep succeeding. Just say, "I will not
5:38 buy more than 50 units in the first
5:40 year." You're going to solve a ton of
5:41 your problems. Uh what you do, you fix
5:43 your What should we have done?
5:45 What would have made us hundreds of
5:47 thousands of more dollars? Stop buying
5:48 after those duplexes. If we buy a 38lex,
5:51 we buy three sideby-side duplexes, focus
5:53 100% of our attention. Are we optimizing
5:55 our contractors? Are we standardizing
5:58 our maintenance? Are we thinking of the
6:00 little things? How much water are we
6:03 paying for when we renovate a unit? Are
6:05 we using high quality but lowflow
6:09 toilets so that we're you do all the
6:10 little stuff like how do we save on
6:12 water bills? What can we build back to
6:14 tenants? How do we fill the building?
6:17 What happened for Cody and I, and I've
6:18 shared this openly all the time, we had
6:21 built a cash flow of positive $20,000 a
6:23 month. As we kept buying good deals,
6:26 truly, honestly, deals with great
6:28 numbers with day one cash flow. People
6:30 would move out. We would fail to fill
6:31 the units. We bought a ton of them. So,
6:34 with about 150 unit portfolio, our cash
6:36 flow went from positive $20,000 to
6:38 negative $21,000 a month. We had done
6:40 one massive cash out refinance. And so
6:42 Cody and I didn't feel it or realize
6:44 what happened until about 3 months after
6:46 it got that negative. And I was like,
6:48 "This doesn't make sense. We have a lot
6:50 of money. Everything's working. We
6:51 bought cash flowing deals. Why does it
6:54 look like our accounts keep going down
6:55 dramatically?" And we get in there and
6:57 we're like, "Oh my gosh." I remember the
6:58 car ride. We were driving back from the
7:00 Robin Hood, which was another problem
7:01 that we shouldn't have bought in that
7:02 first year. We're driving back home and
7:04 I'm like, "Why do our accounts keep
7:05 going down? This doesn't make sense
7:07 based on how we bought these and our
7:08 operating plan. Just fix the stuff." And
7:10 so then here's all you do. This is this
7:12 this is the answer to real estate. You
7:14 identify what the bottl necks are in
7:16 your business and ideally you have one
7:17 thing that's really obvious where you're
7:18 like, "Oh, this is this is the slowdown.
7:21 It's available units. If we're not
7:23 finishing the contract work and we need
7:26 to lease the units, what do we need to
7:28 lease units? We need leasable units. If
7:29 everything's 90% done and no one's
7:31 getting the finishing touches in,
7:32 bottleneck." The problem that Cody and I
7:35 created is that we couldn't identify the
7:36 bottleneck because that was one. Uh we
7:38 also have leasing strategy. Is it
7:40 working? Are we attracting the right
7:41 people? I don't know. We don't have the
7:44 data yet. That could be a bottleneck and
7:46 it could be the big one. And I don't
7:48 know. Have we fixed enough of the core
7:51 issues so that if we do the make
7:52 readies, the building is actually
7:53 leasable, the plumbing is going to work
7:55 correctly. Have we address septic
7:56 things? We had no idea what the
7:57 bottleneck was in the business. And
7:59 there was like five or six things that
8:01 it could be. So, we had to fix five or
8:02 six things at the same time. It took us
8:05 about 6 months to get back to positive
8:07 cash flow. It didn't have to be
8:10 negative. We bought deals that were
8:12 fantastic. Moral of the story here, you,
8:14 yes, you make money on the buy, but just
8:17 because you buy, right, doesn't mean you
8:18 make money. Your operations are the most
8:21 important thing. And people go into real
8:22 estate thinking it's going to be
8:23 passive. On a stabilized, finished
8:25 property, take my 44 unit in Steamville,
8:28 Texas, for example. I spend about an
8:29 hour a month on it today. When we bought
8:31 it and we're stabilizing it, lots of
8:33 hours every week. Lots of on-site. We're
8:36 overseeing it. The project gets done.
8:38 Fix your stuff before you move on. If
8:40 you do this, there is actually a model
8:42 and I am living it. I have many projects
8:44 that are legitimately actual passive
8:46 income. One hour a month, larger
8:50 buildings on autopilot. We have the
8:52 employee model, the systems. We've
8:54 thought about everything from electrical
8:56 current to water flow to tenant
8:58 buildback to leasing strategy. When you
9:00 optimize, the difference is tons of
9:02 stress and I mean a ludicrous amount of
9:06 money. All right, let me do a little bit
9:07 of math for you here. So, with our
9:09 operations today, from where we used to
9:10 operate, when we're looking at things
9:12 like utility bill back, we're watching
9:14 our water flow, we're have a better
9:16 maintenance plan, so we're replacing ACs
9:18 less often. Our average savings are $50
9:21 per unit per month. Now, I own a little
9:23 over 600 units. So, let me run this math
9:25 for you because this is actually insane.
9:26 50 times 600 units, we're saving an
9:30 extra $50. That's $30,000
9:33 per month that we are saving right
9:35 there. That's a ton of money. Now
9:37 multiply that annually 12 that's
9:40 $360,000
9:43 per year. Now our average markets today
9:47 are seven cap markets. So we get valued
9:49 on a cap rate of seven. Which means to
9:50 find value you say what is our new
9:52 operating income. If you save $50 a
9:55 month on expenses, your income goes up
9:57 by that much. Your net income because
9:58 you have less expenses goes up $50 per
10:01 unit. So this is our actual new NOI. It
10:04 is worth divided by 075 $5,142,000.
10:10 Do you know how many deals I have to
10:11 acquire to make $5 million?
10:16 I'll I'll tell you right now. It's a
10:18 ton. It took me a long time to make $5
10:22 million in real estate. If you go back
10:24 and optimize your stuff and you run your
10:26 building right, that is where you make
10:28 money in real estate. Uh that's actually
10:30 my first time ever doing that m that
10:31 math. It's actually super cool. Um, but
10:33 yeah, in my portfolio, if I can figure
10:35 out a way to save $50 per unit in
10:37 expenses, which I have done over the
10:39 past few years, that's worth $5 million.
10:42 Why would you not prioritize that? And
10:44 so many people go, "Hey, I'm comfortable
10:46 with acquisition, or this is very
10:48 stressful to dive in. Roll up your
10:50 sleeves, fix your you'll make so
10:52 much more money." Become an elite
10:55 operator. It is so much easier to
10:57 responsibly save money on bottom line
11:00 while making your units nicer for your
11:02 tenants. You'll have less turnover.
11:04 You'll have less expenses. You'll have a
11:06 nicer unit. You'll be proud of the
11:08 units. And most importantly, as an
11:10 investor, you do actually, in fact, have
11:11 to make money. That's your easiest path
11:13 to the next $5 million is get super
11:15 elite at the operations. Much easier
11:17 than acquisition. That is where you make
11:20 money in real estate. That is how you
11:21 make good deals work better than you
11:24 projected. That's how you give outsiz
11:25 returns to your investors. That's how
11:27 you make seven figures in real estate.
11:30 Hope this helps because that realization
11:31 for me was mindblowing. In fact, if you
11:35 noticed, I did a slight jump cut cuz
11:36 when I did that math, I was like,
11:37 there's no possible way that's right.
11:39 Um, that's my first time on this video.
11:40 I was like, I I knew it was millions. I
11:42 didn't realize $50 on my portfolio of
11:45 savings per unit does in fact equal $5
11:48 million of value created. So, you guys
11:49 can check my math. Uh it is correct cuz
11:51 I did it multiple times during the
11:53 filming of this. But uh yeah, that is
11:54 how real estate works. Remember that.
11:56 Fix your portfolio before you acquire
11:59 Elite Operations worth unbelievably more
12:02 than just being a good deal buyer. See
12:04 you on the next episode.