05: Smart Real Estate Investing with Scott Price

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Today’s guest has a phenomenal way of setting goals and doing things every day to work towards those goals. We’ll hear about that at the beginning of the episode, followed by more details on the actual investing he has done so far. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet: “Surround yourself with good ideas and feed your mind with good information” – Scott Price

Scott Price Real Estate Background:

Husband/wife team leading Bonvolo Real Estate Investments Recently a full time real estate investor after 14 years investing while working full time jobs Has a self-funded portfolio of multi-family, SFR, office, retail, medical, & land in WA for buy & hold cash flow Got to where they are by creating & following vision board & plan Say hi to him at http://bonvolo.com/ Based in Seattle, WA Best Ever Book: 4 Hour Work Week by Tim Ferris

Transcription:

You’re listening to Only in Seattle.

Hello, and welcome to podcast number five of Only in Seattle. I am your host Sean Reynolds with Summit Properties NW and Reynolds & Kline Appraisal. And today I have with me Mr. Scott Price. He is the owner of Bonvolo Real Estate Investments and also a Summit Properties NW broker. Scott, welcome to the podcast. Thank you so much for coming.

Thank you, Sean. Looking forward to it.

Yeah. We’ve kind of been kicking around this podcast for a while with you. You’ve done a number of other podcasts, and that’s why we kind of wanted to have you on this one, because you’ve been through this process, and you have a ton of good information, basically, on real estate investing.

You are a real estate investor, and you own Bonvolo Real Estate Investments. Tell us how you went from having the typical 9:00 to 5:00 day job to owning a real estate investment company for your own assets and assets of others.

Sure, sure. Happy to. Yeah, it’s a very intentional process, and what I mean by that is it’s not something you just fall into, it’s not something that you send out your resume for and apply for a job or something like that. It’s something that you’ve got to make a plan, make a life plan around, in my opinion.

In my case, going back, I won’t go into detail, but literally going back to the age of 12, I won’t run you through my whole life, but at the age of 12 I started reading financial books and started reading about, okay, what are the areas and the businesses and the types of income streams and ways that I can potentially increase my net worth?

And over time, I read it, and the one that kept coming back and back and back was real estate investing, it was the one that was the most doable, logical, tangible, repeatable. It wasn’t like you’re playing the roulette wheel in a casino and whether or not your stock’s going to IPO and all this kind of stuff. It was something that I saw I could control and you could also see that people did really well in it.

What we did, we meaning me and my wife, is we created a vision board about 15 years ago, well more than that, maybe 16-17 years ago, and part of that was, okay, how are we going to get to where we want from a lifestyle perspective? And that meant increasing our net worth and having more passive income so that we could do more of what we wanted to do in terms of travel, family, hobbies, things like that. And again, real estate was the one, it was the one at the top.

And so, just got on a very intentional plan. As you mentioned, I was working two jobs, and they were good jobs. Yeah, there was some Dilbert here and there, no doubt about it, and I don’t miss them, but at the same time, they were jobs that most people would be happy to have, but I wanted to shoot higher than that.

What I did was a couple things. I got my brokers license and I started really diving into the world of real estate, building my education, going to meet-ups, reading lots of books, going to seminars, all this kind of stuff, doing sales, all these kinds of things.

And then, at the same time, I started gradually building my portfolio, and it was a gradual process. I’ve been investing for 15 years and it was about a year and a half ago that I actually left my W2 job and went full-time. For most of that time-

What did that feel like, when you made that decision, you and your wife made the decision, all right, we are cutting off, we’re pulling the rip cord?

It felt great, it felt great.

How did that go? Did it?

We celebrated.

But probably also kind of scary, too.

It was to an extent except that we had gotten to the point where we were very comfortable with that. And actually, my wife has been about five years full-time in our business, and so she left her job earlier than I did.

Okay. You guys have kind of stair stepped this.

Exactly.

And in your story boarding, that was the plan.

Exactly.

Okay. These are all not whimsical choices, these are all planned out years in advance. And so, I think what’s important for the listeners to understand that this is not a get rich quick overnight gig.

Exactly.

It’s a long thought out process.

Yeah. Yeah. Every once in a while, you hear the occasional story of somebody striking it rich and getting some great deal.

Going to a seminar.

Exactly. Yeah. But at the same time, it’s nothing I was going to rely on. The advantage, besides things like benefits and all that kind of stuff, of having a W2 was that all of my expenses and everything were handled by my job, so what I did was all the income, all of the cash out refi’s I would do, all of these kinds of things, I would roll back into another property.

I wasn’t living off my investment, they were actually creating a snowball effect and I was rolling from one to two to four, that kind of thing, throughout. And I didn’t have to suck off of that in any way because I was working a job. I actually worked a job longer than I needed to, but at the same time, in retrospect, it was fine because then I just got more properties along the way by doing that.

And you are referencing the principles that are the underlying content for a book that you read when you were 12, and I’m guessing here, because I did about the same time, too, and it is How I Turned $1,000 into Five Million in Real Estate in My Spare Time by William Nickerson.

That’s a classic that many people have never heard of.

Yeah. But that, back in the day … and this was probably early ’80s I’m guessing you’re talking about, maybe early-’80s?

Well, I think that book came out even before then.

Oh, it was out way before then. It was out in the ’60s I believe.

Yeah. And he came out with a second version. Two versions.

He’s had multiple versions.

Yeah.

But when you’re reading that in the ’80s, it seemed a little jaded, but the concepts were all wildly accurate.

Exactly. Yeah, and it still applies today from a concept perspective.

And that’s what you’re talking about, is just rolling stuff over, snowballing, keeping at it. And that is not a get rich quick, and it was in his spare time, but he had that same plan you’re talking about.

Mm-hmm (affirmative). Yeah. Exactly.

And in his spare time, that meant in addition to his regular job.

Exactly.

To get that ball rolling.

Yeah.

Okay. And so, you’ve been at this a year and a half?

Full-time. Basically, I’ve been working two jobs for 13.5 years.

Okay.

And then for the last year and a half, full-time. And again, I could’ve done it earlier, but it made the transition, but it was fine. I’m very conservative, let’s put it that way, including with my investments. I was perhaps even more conservative than I needed to be.

If you could estimate, when you were working the full-time job and doing the real estate, how many hours a week do you think you were working?

It was a lot because I usually had somewhat demanding W2 jobs, usually team management jobs, or program management jobs, or whatever, generally be tech companies.

Okay.

And so I had that, and then I had the commute and all that kind of stuff. And then, on top of that, basically evenings and weekends, especially in the first five years of that, it was just me, it wasn’t also my wife. The first five years, it was just me. And then, the-

Basically, no free-time.

Well, we do like to have fun, but it was a work hard, play hard kind of mentality. You know? No doubt about it.

That’s fair.

And at that time, we didn’t have our daughter. We now have a nine going on 10 year old daughter, so that also is-

That introduces a whole new thing to the schedule.

Exactly. Time commitment.

Kid’s got to go to school.

Yeah. Yeah, exactly. But then my wife started getting more involved and that, again, was part of the plan. And then, she is not necessarily naturally inclined toward real estate, but saw all the benefits of it and saw that we could create a business, and we could live where we want, or live on Whidbey Island.

I can live wherever I want basically and do this business. We chose where we wanted to live, and she saw the benefits of that, so she started getting into the business and that helped me take some of the pressure off. And then when she became full-time, she got more into the accounting and the property management side, which helped me a lot, as well. It got better.

As the portfolio increased, my number of hours did not necessarily because of our overall plan. I got my wife involved, I got really good property managers, and other team members along, and outsourced, and things like that.

We were talking earlier, before we started rolling, work smarter, not harder.

Mm-hmm (affirmative).

And also some of the concepts of another book that both you and I have read, The 4-Hour Work Week by Tim Ferriss.

That’s right.

Yeah. Some amazing principles in there.

Absolutely.

People kind of poo-poo that, thinking, “Well, that’s just a shortcut,” but there’s a lot … Like you and I were talking about hiring a virtual assistant to take care of a lot of the stuff, these tasks that are repetitive, that can be done by someone else, maybe off-shore.

Absolutely.

Yeah.

You can get a really good value. And I would say, if you read The 4-Hour Work Week and the E-Myth Revisited, if you read those two books, they have overlap, yet some different perspectives, and E-Myth Revisited is a little more palatable for some people, it’s more of the business processes.

Okay. I have not read that book.

Yeah. It’s aligned with what Tim Ferriss says in 4-Hour Work Week, even though it’s not as, I would say, extreme, so to speak.

And he’s got another one. Oh, what is it? The 15-Minute Work Hour or something?

Oh yeah, yeah. 4-Hour Body or something.

Yeah. Yeah, 4-Hour Body. I read through that, and that one’s like, “I don’t know.”

Well he’s just using those four hour and he’s branding it everywhere.

Yeah. I mean, why not?

Exactly.

Yeah. Okay. What are the asset classes that you invest in, and what areas are you covering? You mentioned earlier when we were talking before we started rolling that you don’t invest in King County because you do cash-on-cash return, that’s what you look for. Tell us a little bit about that.

Sure. Yeah, so on the first question of types of asset classes, I do multifamily, office, retail, single-family, a little bit of land as well, and we currently have examples of all those right now.

Okay.

And as far as areas, I would love to own in King County. I’m bullish on King County and Seattle, no doubt about it, but there’s a second part to that, which is I’m a cashflow investor, I’m not an appreciation investor.

Right.

And King County, in general, does not cashflow.

Right. Because rent doesn’t cover the mortgage based on the price, the acquisition.

Exactly. Exactly. To give you an example, just to make up an example, a lot of the places that I look at, they may do something that’s generally called the 1% rule. And this is just a general number, but just to give you an idea, the 1% rule means that if you buy a $100,000 property, that you get $1,000 in rent for it per month.

Okay. That’s the ratio.

Exactly. And it’s just a ratio, just to give you an idea. Whereas, if you buy in King County, you will never get anything close to that. You’ll be lucky-

Right. It’s going to be a fraction of that.

Exactly. Exactly. You buy a $500,000 house and maybe you’ll get $2500 for it.

Right.

That kind of thing. Which is 0.5% rule. But still, all your expenses are still the same and all that kind of stuff, if not more.

Taxes are going to be more.

Exactly.

Yeah. All that stuff.

And it’s harder to leverage in an appreciation market, an expensive appreciation market. You frequently, just to have your DSCR, your debt service coverage ratio, for a lender, you may have to put more than the 20% down that a typical home would-

To get it to cashflow. You’re investing a bunch of money, you got a bunch of money tied up, does this make sense?

Yeah, yeah.

No in King County. What areas do you … Where do you have your stuff spread out?

Yeah. It’s actually west side and east side, so all in Washington State.

Okay.

I have invested out of state, but I’ve actually divested those and I’m all in Washington.

Okay.

I own, on the east side, places like Yakima, and then on Whidbey, where I live, in multiple towns there.

You mentioned a shopping center, I think, on Whidbey, or office building?

Office. Yeah, yeah. I have several office buildings, medical office, number of multifamily, singles, things like that up on Whidbey. Port Angeles, Port Orchard. Just kind of spread other places, too. Just kind of spread around into markets that they have a good enough base to them, meaning an economic base, a demographic base, a population base, that I feel comfortable investing there.

That’s the thing you got to watch out in these secondary and tertiary markets is you got to make sure that the local plant, if that closes down, does that mean that half of the rentals go away?

Right. Your market’s not hosed.

Exactly, exactly. And there are some markets like that. I mean, I get good deals that come my way that are in some of especially the smaller tertiary markets that I won’t touch because when I’m doing my due diligence, I always start at the top level, which is the market level, and I work my way down, and eventually I get down to, oh okay, the specifics of the deal.

When somebody sends me something, I’m going to look at the deal and say, “Okay, well that wouldn’t cashflow enough to be interesting anyhow,” and I’ll toss it out, but if it looks like something interesting, then I immediately jump to the top and I start working my way down.

Do kind of your broad search, and narrow that down, does this still fit criteria along the way?

Exactly.

And then you finally get to a yes or no.

Exactly. And I’ve already done that preemptively on a number of sub-markets around Washington State, so I have the places I’ve already invested as well as places I would invest if a good deal came my way.

You kind of know going into a lot of markets what the deal is.

Yeah. I’ve done [crosstalk 00:14:45]

If there’s a second employer or a single trend going on, something like that, that would impact your investment.

Exactly. Exactly. Either positively or negatively.

Anywhere in Washington. You’ve got stuff kind of all over.

Yes.

You’ve got your own portfolio, and then you’ve got the Bonvolo Investments. That covers both your own personal stuff and stuff you’re working on … Oops. Banged the microphone. Stuff you’re working on with your investors. Correct?

Yeah. Two answers there. Up to now, I’ve worked with what they call debt investors. What that means is basically they have provided me a loan, and in some cases I’ve worked with unusual properties where a bank would not normally touch them.

Say it had very high vacancy or something like that, or it was bought at auction, or things like that where can’t get financing upfront, then I work with debt investors, they’ll get a higher than bank rate kind of return, and then they get interest. Those are the kind of investors I’ve worked with so far.

My next phase, which is where I’m actually getting into starting this year … Last year, I built my home, so that was kind of my main [crosstalk 00:15:55]

Oh wow.

That was my main job last year.

That’s a huge process.

Yeah, exactly. Like I mentioned, after I left the W2 job, then it was kind of, okay, now [crosstalk 00:16:04]

This is what you’re doing.

Exactly. That’s what we did. I had a general contractor and all, but still. And then, this year, now I’m focusing on what is more called a syndication.

Yep. I was going to ask you about that.

And that’s where the investors who come in will actually, they’ll have an equity position as well as what generally is called a preferred return. In other words, they get paid first before I do, and then after a certain point that they meet this minimum of me paying them, then we have a split of whatever’s leftover. That incentivizes me to do a good job because I don’t get paid unless you meet that minimum.

You need to get that return and you need to put money into something that’s going to do well, otherwise there’s no payout for Scott.

Exactly. And I also invest cash in it as well, so I’m alongside them, you know? I’m also an investor as well. That’s the next phase for our business. Going from … And by doing that, I’ll be able to … And I already have a list of investors that basically are people that I’ve met, people that have just come to know me through local meetings or-

Basically, potential investors coming in on your syndication.

Correct. Yeah, exactly.

How hard is that to set up?

It’s not hard if you have the right people on your team, which I already have the attorneys I need. You have to do it right. A lot of people, well I shouldn’t say a lot, but there are a number of people who don’t, they’re not even aware of the rules, the SCC regulations. When you’re doing this, you’re literally effectively selling a security.

Most people think of it like a stock or something. It’s kind of equivalent, actually, from a legal standpoint. And there are a lot of requirements there, but it can all be set up. It’s a cost, it’s expensive, but there are people who do that.

And that’s why people want to go to somebody who’s knowledgeable like you if they’re looking at getting into real estate investing, because you have already paved that path, you’ve got all your systems in place, Bonvolo Real Estate is the vehicle that you use to make those investments.

If people want to come in with money and not have to recreate the wheel that you have, you’re a great opportunity, Bonvolo Real Estate Investments is a great opportunity for somebody looking to do that.

Yeah. Yeah, thanks for saying that.

Yeah.

That’s basically the goal and the idea and the [crosstalk 00:18:25]

You’ve taken out the process, is kind of bottom line.

Exactly. The other nice thing is that, because I’ve been doing it for 15 years and I’ve done all of it end-to-end, to me, the easy part is setting up the syndication because it’s essentially a legal process and an accounting process.

I’m simplifying, it’s also communications and all that kind of stuff, I get that, but the hard part, the part that makes it successful or not, is somebody who’s able to select, acquire, manage, and run a business plan very effectively all the way through whatever the business plan is and whatever the term is for that business plan, and that’s what I’ve been doing. That’s what I bring, and then all the legalities and stuff, I have people on my team who handle that.

Right. Right. Interesting. Yesterday, I was at the grocery store and I always look at the front page of the newspaper just to see if there’s something real estate related, and about twice out of every 10 times I look something pops up.

Yesterday, not the headline, but bottom of the page, “Seattle Home Prices Dip Amid Nationwide Slowdown.” A lot of people in real estate are thinking, “Hey, yeah, we are going to have a slowdown.” The continued growth can’t happen.

Seattle’s been slowing down, not declining, but the rate of appreciation’s slowing down for sure. How are you protecting your investors and your own investments if we have a slowdown? What does that look like for you? What do you recommend?

Sure. Well, the first thing is it’s always interesting the way that the media words some of those things, because it’s slowing down at increase, number one.

Yeah. It’s still going up.

Yeah. And frankly, things are so high right now and so good for those who want to sell at least, not buy, but for those who want to sell, that it’s still good.

It’s still great. It’s a great time to sell.

Yeah, yeah. If you think that the appreciation that has occurred over the last 10 years is going to continue, that’s kind of some wishful thinking. But if it bounces along and stuff, that’s not horrific. It’s not appreciating as much, it is still appreciating.

Right.

The downturn part is definitely something that history says will happen, you know? And history also says that media, as well as individuals and individual investors, and if happens with the stock market and real estate and everything, tend to be overly optimistic for too long, and it’s a matter of you want to actually make changes before a likely change is going to happen.

You don’t get caught in the downturn of the cycle.

Exactly, exactly. Yeah. For me, I’m assuming that a downturn will occur, I don’t know when, but at the same time, assuming, just based on historical trends, based on some of the things that have been happening recently in terms of economic growth and things like that, which has been great, but it can’t-

It’s not sustainable.

Exactly. It can’t continue at that rate forever. Some people think it can, and that won’t happen forever.

Won’t happen forever.

Exactly. For me, the number one thing, I do several things to protect myself, but the number one thing that I do is buy for cashflow. That protects you. When I got through the 2008 to 2010 bottom and I owned properties, the only thing that happened to me was the value of my properties went down. If I’m not selling, I don’t care.

Just like the stock market, if you’re not selling, then you’re not taking that massive hit if you can ride it out.

Exactly. The issue is, do the rents go down, and do they go down significantly? They did not in that period, and just because that’s 10 years ago doesn’t mean it’s going to continue to go up. However, there are a lot of demographic shifts going on right now.

There’s a lot of demand for rental housing, and if an economic downturn occurs, likely you still have that pent up demographic demand, and lifestyle demand, and all that kind of stuff. And on top of that, you’ve got the economic downturn frequently requiring people to now go from home ownership to renting.

What can happen is prices go down significantly, rents may temporarily go down a little bit, but not the same percentage, and you just ride it out. Maybe your property taxes are less, maybe it’s a good thing.

Right. Yeah. Look at it as an opportunity.

Right.

Yeah.

Now, there are other things that you need to do, though, it’s not just … That’s number one. And that’s why I don’t own, like I said in King County, because that’s how people can get burned, because it’s an appreciation market.

Because you can’t make the numbers crunch unless you have a massive down payment in King County.

Exactly.

Is bottom line.

Yeah. When people say there’s a cashflow property in King County, I just laugh. I mean, unless it’s-

That’s a 50% down.

Exactly, exactly, exactly.

You put enough money into anything …

Exactly. And even then, it’s 4% on your money or whatever.

Do I have a better spot to put my money?

Exactly. The big thing, especially in my space, which is commercial, is there’s a big difference in the financing that commercial properties have compared to residential. You generally, for most people, cannot get 30 year fixed interest rate loan for a commercial property. It’s five or more units for multifamily, office, retail, self-storage, anything like that.

The majority of them are about five year loans. Now, they either come due after five years or they reset after five years based on an index, and it may go up, may still have a loan, but it’ll be a different interest rate and it may very well be higher.

What I’ve been doing, to get back to your question, is I have been paying a little bit more in interest, I’m not going from the lowest interest rate, I’m going for a little bit higher interest rate, but I’m getting the maximum fixed period that I can get.

Five years is easy to get, seven years people have, 10 years is hard but it exists, and 12 years is usually about as much as you can get. There are some programs where you do even 35 to 40 years fixed, so there are other options, but what I just explained is the usual range. And I just refi’d, did a cash out refi on a property, and I went all the way to the 12 year, that was the maximum that they offered. I paid-

How many units was that, or what type of property was that?

That particular one was a 29 unit multifamily.

Okay, so big multifamily.

Yeah.

And you are looking to expand out your timeframe on your loans, the period which you got to pay them back or have a cashout on the other end. Is that on everything, like five units and above? Because I know on the residential end, in appraising, we can only appraise up to four units, and that is typically the magic break number. If you’ve got a fourplex, yep, it’s still residential, five plex and anything above, it’s commercial.

Commercial. Exactly.

Does that kind of apply for all the stuff you’re looking at investing in?

Yeah. Yes.

Okay. That’s kind of across the board?

Yeah. And the reason that that’s so important is … I’ll give you an example. If you buy a million-dollar property and you put $250,000 down, you put 25% down, so you now have a $750,000 loan. Okay? And let’s say the market goes down 20%, so you now have a property worth $800,000 and you have to refinance it. 25% of $800,000 is, what would that be, 600, so you’d have to have a $600,000 loan, but your original loan was 750.

You’ve paid that down a little bit, let’s say you paid it down to 710 or 720 or whatever, but that means you already put $250,000 down, and in five years, if the market goes down, you have to come out of pocket with another $110-120,000.

Yeah.

But if you stretch out your timeframe for financing, you can ride out those ups and downs, and if you happen to be in another time when things are good, I don’t have to wait the whole 12 years to potentially refinance.

Right. Or sell it if you-

Yeah, exactly.

And have you sold anything of yours?

I do not prefer to, but I recently have sold two properties, an office complex and a 40 unit multifamily. And the reason for both of those was frankly somebody came up and-

Offered you too much money to turn down.

Exactly. They offered me … Basically, I would not have paid what they paid for it.

You did the commercial version of Zillow’s Make Me Move.

Exactly. Exactly. And it was essentially that. One of them was just literally a broker brought me an offer that it was an off-market deal, knew they had an interest-

And you were like, I can’t turn this down.

Yeah, exactly. And then the other one was more intentional, and actually listed and everything, but that one had a market risk with the existing tenant who was the main tenant, and this is office, and they had a large portion of it, and there was a possibility they may leave, and in today’s market, people are fine with buying that kind of stuff.

And I was pruning on my portfolio, essentially. And that one, it was a little too high on the risk spectrum for me, so I said, “Oh, well good time to sell as well.”

And you made some good money out of it, so it was like, “All right, this hits two categories. Get some cash, get rid of something that doesn’t really fit my criteria, move on to focusing on those properties.”

Exactly. Yeah, in that case, I bought that office complex in the downturn at auction, and I sold it for about three times what I bought it four, and on top of that, had cashflow for the entire five or seven years, and real cashflow the entire five or seven years, whatever it was that I owned it.

Right. Scott, a lot of people … In Summit Properties NW, we focus typically just on residential, we do a few commercial deals now and then, but a lot of people in residential real estate feel like the Seattle market is in the midst of about a 15 year super cycle.

We’re some way half way through that super cycle, and that is based on so many employers, big employers coming in, like Apple recently, bringing a ton of jobs in, that there’s just all this pressure on a limited supply of real estate.

What are your thoughts on that versus having a credit crisis, like what’s kind of maybe being projected in the near future? How do those things offset? How do they impact? What do you think in general?

Right. Well, for Seattle, because you’ve got the great economy that you’re referring to and you have all the geographical constraints, so it’s water-bound-

Water-bound.

Exactly. Well, and even at least Seattle, not Bellevue, but Seattle, its east side is Lake Washington and the west side is Puget Sound, so it’s …

Really geographically …

And that’s what you get this squeeze going on. It’s going north, it’s going south, and it’s not going out in the water obviously. It has a lot going for it. On top of all that, people want to live here. And for people who aren’t afraid of gray days in the winter kind of thing, it has a great lifestyle, it has a good reputation, things like that, and that attracts people too.

I think people are coming here as much for that as anything else.

Exactly. Exactly. And that’s not going to go away. That’s completely independent of an economic downturn.

Yeah. Completely independent of all these jobs because people just want to come here.

Exactly. Exactly. It always has that going for it. That’s all a positive, and I could see perhaps something like that 15 year that you’re referring to, something like that.

Yeah. I think long-run.

Yeah, exactly. Certainly could … It certainly could also help with … Even if there was a sooner downturn mitigating the effects, at least for sellers, for me as an investor, I want lower prices. Now, usually people look at a market being good if it’s high, and if it’s appreciating, and stuff like that, but I’m a cashflow buyer.

Right.

As long as my rents stay the same, I don’t want to say that I like downturns from the perspective that sometimes downturns adversely affect people, so I don’t like that part. People are losing jobs-

They’re going to lose their jobs. They’re probably going to lose their home after they lose their jobs.

Yeah, so let me clarify on that. But from a pure investing standpoint, downturns are opportunities. And we haven’t had an opportunity … We had opportunities in the 2009 to 2012-ish kind of timeframe, and we’ve had opportunities since then, but they’ve become less and less of an opportunity.

They’re pretty small. Yeah. I’ve been talking with these guys who are all in their mid-20s and a little bit younger, “Hey, if we have a slowdown here, this is probably a really good opportunity to take a look and see if you can pick something up, whether it’s a condo, small home somewhere.”

Exactly.

But in Seattle, we just haven’t had too many opportunities, and it’s gotten super expensive for the millennial generation to be able to jump on in.

Exactly. Exactly.

They’re basically not living on the east side or Seattle because those numbers, they kind of don’t pencil like the cash-on-cash return you’re talking about. They can rent for cheaper.

Absolutely. Yeah. Absolutely, and that’s good for an investor who has the property, especially if they have purchased it when it was at a lower price.

Yeah.

Personally, I would not buy most properties now in these high price neighborhoods and get that rent, for the reason I mentioned earlier, just because there’s no return.

Right.

People, they’re paying too much in, and they’re basically just covering their bills at best. And the other thing I see is a number of investors will come in, and they’ll say, “Well it covers the mortgage.” Well, the mortgage isn’t it. You need reserves, you’re going to be replacing that roof in 10 years, things like that. And a lot of newbies come in and say, “Well it covers, even mortgage, taxes, and insurance,” their PITI payment, and that’s not it.

But they don’t look at the whole package.

Exactly. And you can’t scale that either because those people also cannot hire a property manager because they’d be negative. I don’t look at anything where I can’t pencil in professional property management. I mean-

And what does that typically run? Is that 10%?

For residential, 10%. You also may have, depending upon the firm, you may have some lease up fees.

Okay.

For instance-

Get a new tenant in there, lease up fee.

Yeah. And that can be significant because if you have a tenant who leaves once a year and you have turnover time because you’ve got to advertise, you’ve got to do some repairs, things like that, well actually you may have a vacancy for a month, maybe even in a month, but just to give you a little bit of time, so that could be 8% of your income roughly of 12 months.

One-twelfth. Yeah.

Yeah. And then some of these lease up fees are a whole month’s rent, so that’s another 8%.

You’ve got two months down.

Yeah, so you got vacancy, which isn’t a property management fee, but at the same time, you’ve got to consider that, and then you have 10% that you’re paying, and then you may have an additional 8% equivalent because you’re paying one month of a lease up fee. You know?

A lot of people say 10%, but if you have a recurring one year, every single year there’s a new tenant, which may not be the case, but if that occurs, you may have an 18% property management fee. The point is that between reserves and things do break and stuff like that, you want to be in a much better position than just covering the mortgage.

And those are the expenses, that’s the big picture that a lot of people don’t see.

Yeah, yeah.

And they believe what somebody puts in front of them about, okay, this is your cash-on-cash return, but then it’s not until down the road that they realize, oh, there’s a number of other factors that a smart real estate investor analyzes.

Absolutely.

And so, when people invest with Bonvolo Real Estate, some of the “Oops, forgot about that number,” mistake, they do not have that because you’ve already identified what all those factors are.

Absolutely. And it makes the difference between a successful investment and a non-successful one. And also, to the point of things like downturns and stuff like that, even if an investor buys a single family home and they have a mortgage, but then if they have a personal downturn, meaning a job issue or income issue-

Something comes up. Life.

Yeah. And then they have a $15,000 bill for the roof that needs to be replaced or otherwise it’s going to create damage by the leaks that are coming in, that’s when people start getting foreclosed on. Different scenario, but what happened back in 2008.

Yeah. Yeah, and that was just an effect that just kept rolling.

Yep.

Do you have an exit strategy for getting out of specific properties, and then do you have an exit strategy for your business in general? What does that look like?

Yeah. Actually, because I’m buying whole, the one … One thing is, how do you roll up? In other words, how do you get bigger? How do you go from buying the one, to the two, to the four, to the eight, and do that kind of stuff?

You could sell, and if you sold, then you could do something called a 1031 exchange, which is basically for your listeners, I know you’re aware, but for your listeners it’s a tax deferral strategy where you don’t have to pay taxes and you can roll it into another property.

Or, you can do … Which is what I generally do. Or, if you have appreciation built in, you can do the cash out refinances. That’s what I’ve been doing recently. In terms of … My exit strategy is actually not to exit, but it is to get value out of the properties on the appreciation side.

Again, I’m not an appreciation investor, that’s a cherry on top, but when it happens, like it’s happened recently, I take advantage of it, and that enables me to buy more cashflowing properties.

You do a cash out refinance, take that money-

And invest in another property.

Buy another property.

Yeah, exactly.

And just keep that going.

And that way I still have my first property. Now, there’s a little bit lower cashflow on the first property because I now have a higher loan.

Right. Because you’ve taken out some money.

Exactly.

You borrowed that.

Exactly. I have a higher loan balance and a higher mortgage payment. However, I make more than that. In other words, my next investment makes more than that from a cashflow perspective, and I’ve magnified … I’m now paying down two loans, so my net worth is going up every single month, and I’m getting all the tax advantages on two properties every single month.

If I start with a 20 unit and I buy another 20 unit, I’m now at … Each of them go up $25 a month in rent, just do a $25 a month increase on a lease, now it’s $25 time 40 instead of $25 times 20.

Right.

You know?

Yeah.

Everything starts multiplying.

You’re magnifying those numbers.

Yeah, but I’m not actually selling. I have sold a few, but I generally prefer to keep.

You’re a keep and hold on and work the equity you’ve got and kind of keep … Do you have a magic number when you want to shut everything down?

I do not. Basically, the first key milestone was getting to a point where we were very comfortable just covering our expenses, building our new home in a nice location, being able to travel-

On Whidbey Island.

Yeah, exactly.

Yeah, what part of Whidbey are you on?

Coupeville.

Oh, okay. Yeah, okay.

Yeah.

And how’d you pick Coupeville on Whidbey?

Well, I moved out to this area about 20 years ago, I’m originally from the east coast, but, like we were talking about earlier, I picked this area, I actually said, “We’re going to-

You’re one of those guys that says, “I like the lifestyle, I like everything else going on.”

And I found a job here. I actually picked the location, then found a job.

I want to live and work there.

Yeah. I wasn’t pulled by a job, which a lot of people are. They get a promotion and they move somewhere. I picked where I wanted to live. Anyhow, we’re very outdoorsy and my wife and I, we’d visit all these places and we kept coming back to Whidbey and said, “That’s where we want to live.”

That’s where we want to be.

Beautiful, it has a really nice community. And then, about seven years ago, we purchased the land that we’re building on, even before we moved. We moved to the island four years ago, but even before we moved there, we already owned the land we were going to build on.

That’s a great location. Did you take the ferry here today?

Yes.

Okay. You did take the ferry. Okay. All right. I’m going to move on to a couple of more random questions just to kind of get your insight.

Can I answer randomly?

You can answer randomly. Yep, answer a random question randomly.

I’ll answer a different question.

Sure. What is your favorite podcast that you listen to right now?

Let’s see here. I listen to a number of them. I would say some of the better ones for real estate investors specifically, one is by a guy named Joe Fairless and it’s called the Best Ever Real Estate Investing Advice Show. Some variation of that.

Okay, something like that. [crosstalk 00:40:44]

Yeah, exactly. And I’ve actually been on that show, but that’s not why it’s my favorite. It’s just very good, very succinct, and it’s all for people who are doing commercial, multifamily, things like that.

BiggerPockets, which is the most prominent investor website really anywhere, and they have a very good … It’s pretty broad, their topics, but it’s all about investing. I think that one’s very good.

Okay.

And Michael Blank has a good one, the Apartment Building Show. And then there are, yeah, some others that I also enjoy. I subscribe to about-

Randomly.

Yeah. I subscribe to about 30 of them. I don’t have time to listen to all those, but-

You probably pick up [crosstalk 00:41:31]

I see what the topics are. Yeah, and I-

You get clickbaited in.

Exactly. Exactly.

Speaking of clickbait, how about YouTube? Do you have a favorite YouTube channel or favorite YouTuber?

I don’t, and the reason is that when I’m listening to things, I’m almost always doing something else, I’m driving or exercising in the gym, or something like that.

Okay.

I rarely am sitting there watching something. Although, I do occasionally do that, for instance, with your show, I would do it while I’m on an exercise bike.

Yeah.

It’s something I can still be doing two things, but I can also-

Getting a little information and getting rid of some calories.

Exactly.

Yeah. Burning up some calories.

Yeah, so it doesn’t have to be all … Doing something like that, I can’t be looking.

You’re doing cardio.

Yeah, yeah. We have a home gym, and I actually have a recumbent stationary bike, which is the type you sit down on and your legs are out.

Takes away pressure.

Because it’s easier to read. The ones that are up, you can still read, but you’re usually putting something up in front, or you kind of sit back and sit there [crosstalk 00:42:39]

Yeah.

That’s why. That’s exactly why, because it’s easier for me to-

Because it’s easier to get in that position and just kind of go.

Yeah, do email or whatever.

Right. Okay. You invest primarily in commercial stuff, but you chose to hang your license with Summit Properties NW. Tell me why you chose Summit Properties NW.

I love the flexibility of the team and what you’ve set up. I like that you encourage your brokers to be independent and do what works best for their business model. I like that. And I believe that you also really, in a positive way, push modern marketing that is key and critical for current brokers. In other words, you’re doing the right things. I have previously had my license at other larger firms that everybody recognized, and-

The big box brokerages.

Exactly.

Yeah.

And it was a little bureaucratic and a little bit my way or the highway.

And how much of that do you find at Summit?

I don’t find that.

Yeah. We don’t do it that way.

Exactly. And I love that.

Yeah. And we’re going to … Right after we finish up this podcast, we’re going to shoot some marketing videos for you, and we do that basically for our brokers for free, because that brands you as the broker, also brands Summit, and it gets exposure for everybody.

Mm-hmm (affirmative). Exactly.

Yeah, including this podcast. For me, this is a great way to get Scott Price, to get Bonvolo Real Estate, Summit Properties NW, it’s easy marketing. You just kind of put it together.

Yeah. Got to do it. Yeah. Got to really-

Well Scott, I think we have covered most all the questions, one way or the other, that we talked about. I appreciate you coming in so much and I hope the listeners appreciate all the info that you’ve got on residential, or commercial real estate. How can they get in touch with you?

The best way would be my website, which is bonvolo.com. And that’s spelled B-O-N-V-O-L-O.com.

Okay.

And on there, there’s lots of contact information, email, phone, and you can learn more about me there as well.

Yeah. Okay. Excellent. And if people want to Google you, this is like your fifth or sixth podcast?

At least that.

At least that? Maybe more?

Yeah.

I think we went through four before having you on here. Okay.

Yeah, actually on the website, in the news section, it has all those podcasts there.

On the Bonvolo website, go to “In The News” and you’ve got all your podcasts.

Yep. Exactly.

Well, thanks so much for coming in, Scott. Really appreciate kind of the insight that you bring. We don’t focus a lot on commercial investment, but we know it’s out there, so we love having somebody that’s doing it full-time. You’ve kicked the 9:00 to 5:00 job, you’re out on your own, and now you’re doing it for other people. Congratulations and thanks so much for coming in.

Thank you. It was fun.

Yep. Thanks for watching and listening to episode five of the Only In Seattle podcast. We appreciate you watching and listening so much. We’ll catch you in the next one. Bye.

 

Sean Reynolds

Sean Reynolds

The Owner and Designated Managing Broker of Summit Properties NW and Reynolds & Kline Appraisal.

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