This is episode #365, and my guest today is Aaron Chapman.

Aaron is an expert at helping rental property investors get their deals financed using government backed loans…which is a great way to finance your first 10 deals. Aaron considers himself to be the CFO of his customer’s businesses, and goes out of his way to help investors make good investment choices.

Today we talk all about the power of owning and investing in rental properties, and talk about some of the right and wrong ways to analyze rental properties.

If you’re looking to start, or continue building your rental portfolio…you’re going to enjoy this show.

Please help me welcome Aaron to the show.

Highlights of this show

  • Meet Aaron Chapman, rental property financing expert.
  • Learn the right and wrong ways to analyze rental property opportunities.
  • Join the conversation on where the rental market in America is heading.
  • Listen as Aaron explains the power of investing in rental properties.

Resources and Links from this show:

Listen to the Audio Version of this Episode

FlipNerd Show Transcript:

Mike: This is the flipnerd.com Expert Real Estate Investing Show, the show for real estate investors whether you’re a veteran or brand new. I’m your host, Mike Hambright, and each week I bring you a new expert guest that will share their knowledge and lessons with you. If you’re excited about real estate investing, believe in personal responsibility and taking control of your life and financial destiny, you’re in the right place.
Hey, this is episode number 365. And my guest today is Aaron Chapman. Aaron is an expert at helping rental property investors get their deals financed using government-backed loans, which is a great way to finance your first 10 deals. Now Aaron considers himself to be the CFO of his customer’s business and really goes out of his way to help investors make good investment decisions.
Today we talk all about the power of owning and investing in rental properties and talk about some of the right ways and some of the wrong ways to actually analyze properties. If you’re looking to start or continue building your rental portfolio, you’re going to enjoy today’s show. It’s a good discussion. Please help me welcome Aaron to the show. Aaron, welcome to the show.
Aaron: Thank you, brother. I appreciate you having me on.
Mike: Yeah. Yeah, glad to have you here. For those of you that are watching, I’ve got a funny little story about Aaron. We were kind of frantically trying to get things going here last minute. And he does not like Facebook, which I appreciate. I do a lot of stuff on Facebook. But my life would probably be easier if we all weren’t so caught up in social media. So Aaron is actually using his daughter’s account because he just doesn’t want to have a Facebook account. And I appreciate that, man.
Aaron: I’m even trying to set one up. I’m frantically setting up a Facebook account. And it tells me my Facebook account is on hold or [inaudible 00:01:53]. But I tried. It’s important enough to me that I was putting together an account because I was [inaudible 00:02:00] no F on my headstone. So, you know, [inaudible 00:02:05].
Mike: Yeah. Hey, Aaron, real fast, your microphone is cutting out like every few words for some reason.
Aaron: Oh boy. So let me lean in a little better and see if that helps a little bit. How is that?
Mike: Cool. Cool, man. That’s good. So we’re going to kind of start off here, we’re going to talk about financing rentals. I know you’ve helped a lot of investors finance hundreds and hundreds of rentals a year. You’ve got a lot of lessons learned. We’re going to share a lot of that today. But let’s get started by telling us your background and kind of how you got into this business.
Aaron: Well, that goes back quite a ways. Back when I moved into Arizona in 1995, I started running heavy equipment, and then from there, driving truck. And I actually ended up working in the mines in New Mexico. And when they shut down that project in late 1997, I was hunting for something to do. I was literally applying for any job I could. And I could not believe I could not get a job.
And I remember sitting in a parking lot of a landscape materials company in my truck dang near shedding tears because I couldn’t get hired on somewhere. And I had a new baby, my wife. And I ended up going to the store to pick up diapers and I ran into a guy I used to work with. This guy said, “Hey, what are you doing nowadays?” And I explained the situation. He goes, “Let’s go to dinner.” He goes, “I’ve got something you may like.” I’m like, “Cool.”
So we met at Red Lobster. He took me and my wife on a gift certificate from one of his clients. And he was a mortgage broker. And he gave me a business card for one of the brokers he used to work for. He said, “You should try this.” I’m like, “I don’t know what that is.” I said, “I don’t even know the word mortgage.” In fact, what I could only pull up in my memory for that word was an old man and an old lady on TV losing the farm because of that word. So it had a very negative connotation to me.
Well, he set up the appointment. I went in to meet with this guy. I cut a foot off of my hair. I shaved. I went and found a clean shirt. I went and met with this individual. And he put me on as a telemarketer. So late 1997, I started as a telemarketer, did that for two weeks, asked him to see if I could start working on those deals. And to try and supplement my income, I started driving a truck again to Sacramento and back once a week, and then go to the office three days and build a business. That wasn’t working so well.
I went back to running heavy equipment. I would be at the yard at 3:00 a.m., work until noon or 2:00 p.m. every day, get in the office as quick as I can and work till 10:00 p.m. every day for a year until I started getting a business going. I spent three hours a night for a year. And it started to move. It was tough. It was a lot of work to get there. But five years into it, things started to really take off in a big way. The crash hit. I came back and kept at it. But I’d been working with investors since 2003, in fact. And now, I have a team of 11. We do about 700 units a year now.
Mike: That’s great. And the thing about working with investors, I guess, and the mortgage business is that you have repeat customers, right? If you’re just working with homeowners like, you know, you’re at the mercy of whenever, however frequently they want to move and if they remember you. So I assume it’s a different model altogether really, just working with investors?
Aaron: Oh, in a big way. One is the relationship is so much better, right? You start the relationship with your initial conversation, deciding whether or not there’s a continuity to do business. And then from there, you start that ability of getting that repeat business. Yeah, it’s not as big a transaction. I know our owner-occupied guys in my business, well, if they’re getting $200,000, $300,000, $400,000, $500,000 transactions, my average loan size is about $90,000.
So it’s nothing sexy. But, it’s six, seven, eight [inaudible 00:03:29] transactions because of his ability to pay them off and use those [inaudible 0:05:36]. But it’s much better with the investors. That’s what I really like about it. I can do loans all day long. I would much rather have relationships.
Mike: That’s awesome. Hey, I don’t want to disturb the show too much. Your microphone’s still cutting out a little bit. I don’t know. It’s just like it just [inaudible 00:05:52] or something. So I don’t know what you could do. I don’t think it’s anything you could do. I think it’s a technical issue. But we’ll just [inaudible 00:05:56].
Aaron: It very well could be. I am hard-wired. I actually even bought a wire for this thing, drilled a hole in the ceiling of this place, run it down from the router, picked up a new mic to be sure this would work.
Mike: Awesome. Awesome. We’ll just keep trucking through here. Obviously, a lot of people that are listening to the show, watching the show, are real estate investors or aspire to build a rental portfolio, if they don’t already have one. And one of the challenges that I had when I first started is I left Corporate America. And I know you primarily focus on government-backed loans, primarily, right?
Aaron: Yeah. Those seem to be the ones that give people the best long-term usage.
Mike: Right. Right. And so the challenge that I had when I first started in real estate investing is I quit my Corporate America job. And then so I didn’t have two years of tax returns. I was self-employed with less than two years’ tax returns. And so I largely didn’t qualify. And then by the time I did, I had way more than 10 rental properties.
But talk to people out there. When I coach people now that still have their job or their spouse still has their job and they’re getting into real estate investing, I say, “You know, you’ve got to take advantage of this opportunity to get government-backed loans, if you’re going to be accumulating rental property.” So talk about that kind of scenario, that issue, a little bit and maybe explain it a little bit better than I just did.
Aaron: Well, the government-backed type of loan [inaudible 00:07:15]. And so what I tell a lot of those that I start working with . . . I work with a lot of people that are first into this. They’re just starting out. So the first thing off is getting their mindset right. In reality, if they’re especially stepping into the turnkey world, they’re not just buying a turnkey piece of real estate. That’s what it’s being penned as. It’s being penned as a property that’s been rehabbed, ready to rent, or rented. That’s the turnkey piece.
But I really get into is you’re buying a turnkey business because it’s not just a property. You’re actually getting an operations division ready to rock and roll. So when you get into the scenario where you’ve got somebody working with you directly. So let’s just say you’ve got some turnkey properties you’re going to be hooking these people up with. You are now their chief operations officer. You have not only the acquisitions division, their rehab division, their rental division, maintenance, management, all in one.
So I tell people, “If you’re going to buy a business, you’ve got to pay a lot more than market price just for the assets. Here, you’re buying one for the market price, the assets. And now you have a business operating.” Now, when I first talk to them, I’m applying for the CFO position. I’ve been doing this since ’97. I’ve worked with real estate investors since 2003. I do 700 units a year. I know a little bit about the space. So when it comes to just doing a loan, sure. I mean, Wells Fargo, Chase, Bank of America, God bless them. But, they’ve proven you give a monkey a phone, yeah, they can close a loan. That’s how we generate revenue. That’s not our business.
Our business is their business. And so what we do is I take an approach of I’ve got 11 staff members that just grind these things out. And my job is to do the spit-balling, offer perspective from the CFO perspective, say, “Hey, we’ve got your entire finances. We’ve got your goals. We know what you want to do with your business. Here’s the things that we think you should be thinking about, Mr. CEO. But you make the decisions. We’ll get your Chief Operations Officer on the phone. We will have a little board meeting. And we will set you up.” And we walk you through the process from number one to number 20, number 30, whatever it is you want.
So then we get back to the Fanny Mae properties, the ones that are government-backed. We can do 10 finance properties, 20% down on the single families, 25% down on the multi-units, for all 10. So we want to take advantage of that. We want to structure those in a way where a person has a lot of flexibility. A lot of individuals ask me, “What about the 15-year or what about the 25% down? I want a lower rate.” Rate’s inconsequential. We really need to get into cash flow. That’s where we need to change the mindset.
Rate is a very consumer-based thought process. No longer consumers. These are Chief Executive Officers. They need to take the consumer mindset off, throw it out, and to think business. So when you’re thinking 15-year, I had a guy this morning ask me, “Well, why shouldn’t I do a 15-year? It’s like a half percent lower.”
I said, “Okay. Let’s talk about you getting 10 properties with 15-year notes. And then let’s think you have three of them going unrented. But your cash flow barely covers the note. In fact, sometimes some of them, you have to pull some money out of your pocket. What happens when three go unrented? How much do you have to go to your pocket to support your business? A lot. But if you have 30-year notes, more than likely, you have enough cash flow coming in. You can cover those three vacancies while they’re getting rented and still be cash flowing. It’s a matter of flexibility.”
Mike: Yeah, I was thinking about those [inaudible 00:10:37]. The great things about those, the government-backed loans, is that there’s no kind of early payoff consequences. You’ve got that flexibility. You could always pay more down if you want to. Probably one of the greater things is you’ve got a 30-year fixed rate loan.
So I know like with my rentals, most of my rentals are if they’re not paid off, they’re financed through a local bank. And the rates adjust, some of them are different, every three of five years so you’re at the mercy of where rates are at instead of getting them locked in.
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And those are the rates adjust, some of them are different, every three or five years. So you’re kind of at the mercy of where rates are at then instead of kind of getting them locked in, right?
Aaron: Exactly. It’s the mercy of the market. And let’s talk about where rates come from, right? Did you see “The Big Short”?
Mike: Yeah.
Aaron: How many times?
Mike: Probably two or three.
Aaron: Two or three. You have to watch it two or three times. So if there’s anybody on this call right now watching, get “The Big Short,” out. Watch it three times in a row because there’s a lot to understand. And, in fact, my daughter’s with me here. And she’s my assistant, as well. We watched it on the plane. And I would pause it and explain because there’s so much data in there. Do you remember where it said really the money’s coming from that’s funding these loans?
Mike: Not right off the top of my head.
Aaron: Okay. So you remember that scene where they’re in the conference room. He’s got the overhead projector. And he’s like, “Who doesn’t pay their mortgage,” right? Who was he presenting to? Do you recall?
Mike: It was just a bunch of bankers, right?
Aaron: He was presenting to a pension fund manager. So when you think about it, you’ve got a pension fund. Some of these are massive funds, have huge amounts of money. What they’re trying to do is take somebody else’s money and put it somewhere to make a margin on that. So that way with that margin, they get to pay their bills, pay their bonuses, exist, pay that retiree a small amount with a fixed income. So they always have to make money.
Well, what he presented to them say, “Hey, we can take a ton of your money, put it out there. You’re going to get a fixed rate of return to cut your overhead because you don’t have to keep thinking about what you’re going to trade for. And then you keep a piece of that. We’ll keep a piece of it. Everybody makes money. And the guy over here gets his pension.” So it worked for everyone.
And then you jump ahead to where the gal’s sitting in the bubble bath. I forget her name. I think it was Margo something-or-another, sitting there drinking champagne. And she’s like, “Then they ran out of money because people didn’t keep qualifying for loans.” So they had to start getting a little bit more creative. That’s where the problem started.
But what it goes back to and the main lesson there is the money is not ours. It’s not the bank’s money. It’s not the government’s money. It’s somebody out there investing expecting a return on investment. And if they feel comfortable investing it with you, Mr. Investor, then you have the ability to take that money and put it to work and actually make money upon money. And when we really get down to running the numbers, your return is infinite. People are running cash-on-cash returns. And I think the number is way off, extremely off.
Mike: Yeah. So let’s talk a little bit about . . . well, let’s kind of continuing on it, the right way to analyze our rental because a lot of people, like you said, they’re using a cash-on-cash return. Everybody’s using different metrics. Some of them want to buy a house for no more than 100 times rent. There’s all sorts of people that have different things. In your opinion, what’s the way to look at a rental opportunity?
Aaron: So I don’t know that there’s a wrong way. Who knew because I’ve talked to, like I said, hundreds of thousands of people, not hundreds of thousands, but hundreds and thousands, and it’s amazing how different it is. I can take the same piece of real estate, throw it into the hands of five different people in one market. I’ll have five different analyses on it. And they’ll all be really close. But they’ll be off, all of them.
I was on the phone with a couple the other day from California. They both had different numbers for what their cash-on-cash was and what their maintenance was, what their vacancy would be. So because of that, I say let’s get really simple. Let’s dumb this down because I’m hardcore redneck. So I like to dumb things down a lot. So in dumbing this down, let’s talk about a $100,000 transaction. Are you okay with doing some math with me?
Mike: I’ll do my best. In fact, I could cheat. I’ve got a calculator here.
Aaron: Oh, right on. Check it out. Yeah. I’m going to go off my head. I’m going to let you do the calculations. So $100,000 transaction, 20% down. How much is that?
Mike: $20K down.
Aaron: Right on. $20K. So I always tell everybody, budget $5,000 for the title costs, lender fees, inspections, appraisals, taxes, insurance, everything to close. You’ve got $5,000 there, 20% down. How much is it you’re spending?
Mike: $25K.
Aaron: $25K. And most people are going to take their cash flow and run their cash-on-cash return off of that, right? Okay. So I like to say, it’s not $25K. It’s $5K that you’re spending because the $20,000 is still yours. You just choose not to touch it. It’s parked somewhere where you can’t get at it readily. That’s the whole point of savings. Put it somewhere where you’ve not going to touch it. Do you remember, I think it was “Vegas Vacation”? He stored his in a Yuban coffee can buried out in his yard. It’s the same principle.
Mike: That’s right.
Aaron: The difference is this is growing. So how is that $20K growing? So if you’re putting $20K down on a $100,000 acquisition, what’s the bridge between $20K and $100K?
Mike: Say that again? You lost me.
Aaron: If you put $20K down on $100,000 acquisition, what’s the bridge between $20K and $100,000?
Mike: I guess the $80,000 difference.
Aaron: $80K, right? $80K. And that can be a loan which we know came back from somebody’s pension and is expecting a return. So $80K. So organically because somebody’s going to occupy that asset, they’re going to pay down the $80K for you, right?
Mike: Right.
Aaron: So over 30 years, that’s 360 months, you take that 30 years and you divide that by $80,000. You get 13.33% of the original $20K every year when you average it out. So it’s not a compound interest. It’s just 13.33% of the original $20K ever year going on top of it. So we know because of that, your $20K becomes $100K, period. We know that.
Mike: And you’re saying that’s just principal reduction, right? That’s kind of equity I guess, yeah.
Aaron: Principal reduction. Somebody’s paying it down.
Mike: [Inaudible 00:17:39] talking about it, [inaudible 00:17:39] appreciation yet, right?
Aaron: No. We’re just talking about that. So your $20K became $100K organically over there. So we take that and sit it on the shelf. We know your $20K’s becoming $100K. Now, let get to the money you spent because the definition of spent, it’s gone. You’re never going to get it again, right? That’s the $5K. So that $5,000 is gone for services. We’re even throwing in some of the taxes and insurance in there, too. I mean, we paid some of that with it. And that’s gone.
But is it reasonable to believe that on $100,000 acquisition with the 1% rent to value ratio that you would net after paying property management, paying the principal interest, and the taxes and the insurances, that you would yield $250 a month? That doesn’t include the maintenance and vacancy, just the hard cost. $250 seems simple, right?
Mike: Yeah, that’s definitely below what I look for for sure. So yeah.
Aaron: Exactly. We’re flying in under your radar. And it sounds good, right? Okay. So $250. How long is it going to take to get your $5K back when you’re getting you’re getting $250 a month?
Mike: Twenty months.
Aaron: Twenty months. And you’re 100% square. Your $20K’s still yours. It’s growing in this little 30-year annuity. You got paid back your expenses in 20 months. So how many months are left on a 360 month example?
Mike: Three hundred and sixty minus 20. I should be able to do that in my head, right. But 340 months.
Aaron: That’s why we have computers and phones and calculators, brother, so we don’t have to do that in our head. If I lose any more brain cells, I’m a talking monkey. So we’ve got 340 months. How much money are you going to make in 340 months off $250 a month?
Mike: Let’s do that. That would be $85,000, coincidentally $85,000.
Aaron: $85,000 plus you’ve got $80,000 that you made because your $20,000 was sitting in there, right? And you still have your $20,000. So add the $80,000 plus the $85,000. What do you have?
Mike: $165,000.
Aaron: $165,000. And you got paid back. And you still have your $20K. Okay. So now, there’s something we missed here. What did we miss talking about?
Mike: Well, there’s obviously appreciation. And there’s also some tax benefits in there, which are a little harder to calculate. But yeah, appreciation [inaudible 00:19:52].
Aaron: Tax benefits, appreciation, rent raises. We didn’t even talk about those yet. And we already have a ridiculous return on investment. Those we’re going to put on the shelf. There’s something else we missed. I touched on it. But I didn’t add them into the equation.
Mike: What did we miss?
Aaron: Maintenance and vacancy. What is the factor you use to calculate maintenance and vacancy? This is where it gets hairy. This is where everybody’s got their own calculation, man.
Mike: No doubt about it. This is why you’ve got to have a portfolio because I have some that are just terrible and then some that have no issues for many years at a time. But, you know, I think a lot of it comes down to the class of property that you buy, as well. So what I’ve found, I own a lot of C-class properties, which I would historically tell you that they cash flow the best. But I could also tell you that they have the most turnover and the most maintenance issues, as well.
Aaron: Well, I’m going to throw a bomb on this because a lot of people say 8%, some say 5%. And one said he gets really, really aggressive. He says 10% of his rent. I say 40% of the acquisition price.
Mike: Forty percent of the acquisition price. Okay.
Aaron: That will cover for the 30-year window. Now, does that seem too aggressive? Does it seem unreasonable? Say 40% of the acquisition price to cover your maintenance and vacancy for the 30 years?
Mike: Definitely not maintenance. Vacancy, it depends. Like if you’ve got like a C-class property and they go vacant every . . . even if it went vacant every, you know, a month out of the year, I mean, it’s hard, man, because you have so [inaudible 00:21:23].
Aaron: It is a hard number to calculate. Everybody tells me . . . like they tell me $25,000 or $30,000 would be more than enough. So I say $40,000 just to be . . . because I’m the CFO. I stomp on crap. I’m supposed to stomp, right? C-class properties, they’re a whole animal of themselves. We’re going to say you going to have an average of B pluses between your As and your Cs. So let’s say the average is B plus, 40%, and you factored in how much is that, 40% of the acquisition price?
Mike: $40K.
Aaron: $40K. So back that out of the $165,000. What do we have left?
Mike: $125,000.
Aaron: $125,000 you made with getting paid back. That’s after getting paid back your $5K. You still have your $20K sitting there. You have $125,000. You’ve got $40,000 for all contingencies. You tell me what the cash-on-cash return on that. It’s damn infinite.
Mike: Yeah. I’m not going to be able to calculate that one with this simple calculator.
Aaron: There is no calculating that one. I mean, I’ve sat here and racked my head around. And I just decided it’s infinite because you have no money left in the deal.
Mike: Right. No, for sure. And we didn’t talk about appreciation. And historically, I tell people that, you know, I’m in Dallas. There hasn’t historically been a lot of appreciation here, 2, 3% a year. But in the last five or six years, that has been far more. And so historically, I’ve told people like, “You know, just go after cash flow. Don’t worry about appreciation. If it happens, that’s great. But don’t count on it.”
The reality is, is there has been massive appreciation here over the last five years. And truthfully, even though the government doesn’t talk about it or it kind of makes up their own calculations, there’s a lot of inflation going on, right? So rents have been going up, up, up. You know, we protested our or we get our tax bills like a few months back here. We have a process every year. We look at our tax bills. I have my bookkeeper kind of go over . . . I taught her how to run comps. So she’s going to look to see, “Hey, they’re trying to raise our taxes.”
Like if it’s over a certain amount, run the comps and look at it and see if it’s justified. And some of our property values, I was like, “This property’s not worth that.” And then she’s like, “Well, here are the comps.” And I’m looking at them like, “Holy cow. This property’s worth that?” And so, it’s been something that I didn’t really count on. At least mentally, I convinced myself, “Don’t count on that.” But especially if you hold a property for 30 years, I mean, you’re going to see some massive appreciation in most markets around the country, I would say.
Aaron: Well, and I think most of the markets people are buying in right now you’re going to see very small appreciation over each year. But 30 years is going to yield something for you, right? And I don’t even take that into account. We’re showing you infinite return. We’re not even taking that into account or the tax benefits or any rent raises. And a lot of people ask me, “Well, what is the real possibility that we’ll continue to have a rental market?” And I’ll throw that back to you. I have my answer to that question. But I’m curious what yours is.
Mike: Like how stable is the rental market?
Aaron: Yeah, rental markets across the country.
Mike: Oh, I mean, it’s like one in three houses in America is a rental property, right? Home ownership is not really . . . I mean, they’re starting to monkey with the rules again, you know, in terms of lowering the qualifications for loans. But I don’t think that the ownership rate is really going to go up substantially. You know these numbers better than me. But even back during the time, before the crash when things got really sloppy, I think home ownership was still like 68% or something, right? I mean, there’s still a massive kind of rental market out there.
Aaron: Yeah. When they were giving houses away, it was still . . . I mean, there was still tons of rentals. Now, when I look at that thing, because you brought up inflation a moment ago, do you remember who Robert Reich was or is?
Mike: Oh yeah.
Aaron: He’s still around. I think he’s a professor at Berkeley. And it’s kind of weird that a guy like me is going to bring up Berkeley. But he was the Labor Secretary during Bill Clinton’s first term as President. And he did a documentary back in 2011 is when it came out, I’m pretty sure it was ’11, called “Inequality for All.” Have you seen that?
Mike: No.
Aaron: Okay. So it’s very kind of a liberal thought process, but actually has some good facts and figures in there. And it kind of illustrates to me why we would still have a rental market for a long period of time, especially when you bring up the inflation thing. He asks this questions. I’m going to ask you. What year gave us the highest median income for the average worker?
Mike: I bet it was a long time ago. I don’t know the answer to that. But I think things are getting worse, if that’s what you’re kind of alluding to, for the average American, for sure.
Aaron: For the average American, yes. So the average worker, he said, had the highest median income in 1978. Back then he says when you adjust it for inflation, it was $48,000 a year. The average 1% or adjusted for inflation was about $301,000. Now fast-forward to 2010. What do you think was the income for the average worker in 2010 because he did this in 2011. And I haven’t heard . . . I haven’t researched the numbers yet.
Mike: I don’t know the number, but I’m sure inflation-adjusted, they have less purchasing power now than you did in 1978, right?
Aaron: Yeah. $32,000. Now the adjusted inflation, what numbers have we been given for inflation? Are they real?
Mike: Oh, hell no. They like take out the cost of food and the cost of fuel. It’s like, “Well, that’s what most people spend their money on.”
Aaron: Exactly. The two things they spend money on, all of a sudden, we’re not going to use that as an inflationary calculation. And he uses the inflation numbers that the government gave. And he still came up with that gap. So it shows me where we really are. So if we have the wages going down, so the average 1% in 2010 was making $1.1 million. So what we see is, you know, you go back to the old policy of trickle-down, and honestly, things actually flow up. We’re much more productive than we’ve ever been. We’ve got a lot more money coming in here. But it’s not flowing across. It’s going upward. And that’s a whole different political discussion.
But what that tells us is the average individual does not have enough money to save for the down payment, much less fix it up. My argument to anybody that starts to step on turnkey is like, “Wait a minute. You’re really stepping on a world that needs to be given a lot more . . .” They need to be given a lot more credit than what they are being given globally because you’re fixing up neighborhoods. You’re giving people an opportunity to rent a home that’s been rehabbed.
So if people are doing a good job on the rehab and they’re good, clean rehabbers, they’re getting something they never would have had before. They can’t afford that. They can’t afford the down payment. We’re giving people an opportunity of great housing. I think there’s stories upon stories of individuals getting ready to get the keys to rent their new house. And they hug their property manager and saying, “I can now have Thanksgiving at my house this year.” And he looks at them kind of, “Well, huh?” He says, “You should have seen what I lived in before. I wouldn’t bring people over for a family gathering.” Now they have that. That’s being missed. That’s not being looked at as to what blessing is being given there.
Mike: Yeah. And the funny thing is, you know, more and more as . . . by the way, people that are listening to this, we’re kind of ranting now. But this is basically building the case for rental properties are going to continue to be a strong investment. So a couple of interesting things. When you buy rental properties, when we’re talking about the value of a home, it’s usually an example of a $100,000 purchase price. Well, that’s usually . . . let’s just say the market value is also $100,000.
When we use that phrase “market value,” what we’re saying is that’s the value that you could resell it to another homeowner for, right? But the reality is, is rental properties should be valued more like commercial properties where it’s more of an investment vehicle. It’s not based on . . . now, the truth is if you wanted to resell that house, that would be the market value. But if you’re buying it from an investment standpoint, that’s not really the way to look at it because it’s highest and best use is a rental versus just shelter for an actual owner, right?
Aaron: Well, yeah. There’s more value in it as a rental. There’s more value in it as a business because like we were talking about before, if they’re buying an actual operating business, a turnkey business, with executives in it who have already made the mistakes, who have already found out what doesn’t work, not at their expense. You don’t have to start your business with three years’ worth of capital to screw things up just to make a profit. You’re making a profit from day one.
And yes, there’s more value there. But we can’t sell it that way. We can’t get appraisals that way. It has to be sticks and bricks. So the investor is actually getting way ahead by buying it for market value. They’re buying the company for the asset value. And let’s get into that real quick here.
Now, for anybody who’s in the turnkey side of this listening here, we’ve really got to be using the MLS to be able to list these things out and document the history of the sale because that’s where appraisers are going to get their data. It’s happening out there across the country. I have 23 licenses. I work in 23 markets. Every single one, the appraisers go to the MLS for the value. They don’t go off of county records and sales any more. They’re looking to see what does the market dictate is that value?
So to your point, they’re getting a extreme discount on this business to buy the sticks and bricks at market value, based upon what a homeowner would pay for it.
Mike: Exactly. Exactly. Yeah. Hey, a little plug by the way while we’re talking about turnkey is we have actually quite a few people that might be listening to the show, we help people buy turnkey rental properties. So if you go to passiverental.com is our website, passsiverental.com, which you can find on FlipNerd, as well. We help people buy properties in lots of different markets. So some of the best rental markets in the country right now. So a little shameless plug there for [inaudible 00:30:28].
Aaron: There is nothing shameless about it or shameful or whatever you want to put in there because we need to plug this stuff because a person who’s buying an investment property needs to go to a professional source like you’re talking about right there and like you’re plugging to be that chief operations officer, help them find the markets with the right people to run them.
Mike: Yeah. I have a friend, I don’t know if he’s going to listen to this show. He just told me he started listening to the podcast. But a neighbor of ours. I’ve actually helped a few of our neighbor friends start buying rental properties. And he’s a pretty successful guy, works for a big company in a sales organization. So I’m sure he does well.
He was talking about he wanted to start buying rental properties. And he was like, “I want to kind of subsidize my retirement.” And he’s like, I don’t know how old he is, probably mid-40’s. I’m like, “Subsidize? Let me show you how to like 5X that.” So I think people have to get over this mindset of, “I’m just going to invest in my company’s IRA or my 401K or whatever,” and just . . . I know with my rental portfolio, I don’t have that many. I have like 40 right now. We’re probably going to start doing a lot more stuff in some other markets soon.
But just that piece alone, I know that because of the appreciation, because of the cash flow, because we’ve been aggressively paying stuff down over the years, which isn’t the right answer for everybody, but that’s kind of been our recipe is we’ve got a nice little nest egg there that is going to help us retire early, if we want to, or more comfortable, for sure.
Aaron: Oh, great. And like you said, there’s a mindset there we’ve got to work on. That’s my main goal is help the mindset change from a consumer to a business owner and seeing the potential. You know, people talk about subsidizing their rental, I mean their retirement. Like you said, there’s a greater capacity here. It’s just a matter of understanding what your capacity is.
I need to have that data on their personal finances to be able to determine what can we do? What is that potential? Then, let’s build your vision. Then, let’s set these goals up and these milestones. And let me check on you periodically and make sure you’re reaching them because if you’re not, we need to know why.
Mike: Yeah. Yeah. Well, we’re going to start to wind things down here. What have we not talked about yet? If people are listening to this and they’re thinking, “Hey, I want to own rental properties. I don’t know where to get started.” I would say contact us, again, at passiverental.com where you can schedule a call with my team. And we’ll kind of talk to you about some of the pros and cons and markets you might consider. And then we’ll kind of introduce you to people like Aaron that can help you with getting financing.
But before any of that happens, Aaron, back to the mindset. What would you tell people that they should consider before they take the next step of even contacting us?
Aaron: Well, one, get the mindset right or talk to some people to help them with the mindset. And they can look me up. I’m aaronbchapman.com. I’m trying to find aaronchapman.com. Some kid was putting his baseball stats on it years ago. And it made me available again. And the other is you can look me up on the MLS. My number is 267844. Check out my MLS ID. See what states I’m licensed in.
Make sure that you’re comfortable with talking with me. And then let’s schedule a time to talk. We can start figuring out how we could structure this and help them blend into what you’re doing. And then understand that the people that are helping you and the people that you’re talking about from your group, they’re in it, yes, this is our business. But it’s also for you as an individual. You know, I have learned a lot [inaudible 00:33:41].
Mike: Aaron, we lost your audio. I don’t know if you can hear me.
Aaron: You’re [inaudible 00:33:56].
Mike: I don’t know what’s going on. It’s like there’s a magnet that’s like sweeping over your house or something that’s . . . go ahead. Say that last 15 seconds.
Aaron: [Inaudible 00:34:03]. Sorry. Okay. So I was just talking about the things that I had learned over the time in business and how elementary it’s become. And do you remember back in the mid-2000s the whole craze about “The Secret?” Everybody was reading the book, watching the movie.
I listened to that running a marathon. And I just had a little bit left on it when I had finished the marathon. And the one thing I remember when I was thinking about the attitude of gratitude and all that, that nobody ever talked about how it worked or why it worked. They just said it worked. The universe just delivers. And I just believed that it would.
And I started to find how gratitude does make a huge difference in our world. And I think people need to start incorporating that into themselves a lot. And I’m taking this message to everyone, that I stumbled into an opportunity to understand why it works. If you don’t mind, I would love to share that with everybody who’s listening.
Mike: Yeah. Please.
Aaron: So I had an employee who she was younger, great at her job, a millennial. She was doing just something I think she needed to be rewarded for that she was doing. And it was coming up on her six-month mark. And I told her, “If you last here six months, we will look at your employment. And we’ll look at your income and see what we can do with that.” So I had to write up this narrative for corporate to be able to approve the increase I wanted to give her. So I looked online to see what’s the average increase for a person’s income. Have you ever looked to see what the average would be across the country?
Mike: No.
Aaron: Well, it’s actually two to three percent of what their base is, right? The number I had in my head was like 10% of her base and then 30% of her bonus by hitting certain metrics. So it was a big number. And it took me a lot to get corporate to agree to it. So I had to write up all this commentary as to why.
Finally, it come that they had approved it. And I was looking forward to sitting down with her and showing this to her because, you know, I just love it when people respond. It’s like your kid opening his Christmas present. It’s the thing he wanted, right? You want to see the light on his face.
Well, she got the package. I explained it to her. And she looks at me with this look of kind of distain. She’s like, “That’s it?” You can’t do any better than that?” So I ask you, how would you respond to that, just from your gut, and not what your head’s saying. If there was no rules on how to respond and you could say whatever you wanted, what would you say in that environment if somebody said that to you after you went through hell to get them this?
Mike: Right. Yeah, that seems like that’s disappointing.
Aaron: It’s very disappointing.
Mike: Disappointing that somebody would respond that way, yeah.
Aaron: My gut was, “Okay. One, not only am I not going to let you have your raise. But I want your job too. So go ahead and clean out your desk, you ungrateful little individual. And then on your way out, drop the keys off to your car because you don’t deserve that either.” That was how I felt. But I did not respond that way. I took it as a coaching opportunity. And things just didn’t quite mesh with us after that because of that issue.
Mike: Yeah, that’s soured.
Aaron: Yeah, it soured things. And I’m like, man, I was helping her. And this is what the end result was. I was frustrated. Well, that same week, I’m driving to the office. And I’m exiting the freeway. And there’s a man, we know the scene, standing on the side of the road with his cardboard sign. And something hit me about the guy as I’m looking at him. It just rang to me this guy was really in need.
So there’s a spot where I hide cash in my truck. There was one bill in there. I rolled down the window. And I held it out. He walks up. He takes the bill, says, “Thank you,” turns away from me, starts to walk away. And he unfolds it. And he stops. And he looks back at me. He says, “Are you serious, man,” as he’s holding this up. I said, “Yeah, why?” He goes, “This is $20, man.” I says, “Yeah. It’s yours.” He walks back to me. My arm is still up on the window, you know, like you usually have it. He reaches up, takes my hand, pulls it towards him, bows his head, and audibly says a prayer of thanks to God and a blessing on me.
And with tears streaming down his cheeks, he looks up at me and goes, “You have no idea what you’ve done for me. Thank you.” And he kept thanking me profusely. And at that point I’m thinking, “Dude, do you have a [inaudible 00:37:46] because I’ll swipe my card,” because that’s all the cash I had. And then as I’m driving away, it just hit me. It’s like, wait a minute. On one side, I gave someone a $10,000 a year increase. And it felt like she spat in my face. And I was angered about that. And I wanted to take everything from her. I gave one guy $20. And I wanted to give him everything.
And then it hit me. That’s how it works. It’s not just and us and God thing. It’s an us and everybody else thing. How you respond determines what you get in return. And if you respond negatively, they will take from you because people don’t want to help a person who’s ungrateful. But if you’re grateful for the smallest thing, you get greater things. It’s an amazing, amazing concept that has real practical application.
Mike: Yeah. For sure. Hey, thanks for sharing that story. That’s powerful. Yeah. It’s been a long time since I’ve watched “The Secret.” But one of my takeaways from it too, that it kind of ties into what you’re saying here, is, and maybe you’ll agree with this, if you remember, if you haven’t watched it for a while, it is a powerful movie.
But one of the things is that some people kind of left thinking, “Well, all I have to do is just think about what I want and be grateful and things will just happen.” And I think one of the big things that was missing that I want to make sure people hear is you’ve got to take action. You’ve got to work hard for things. And I feel like that one kind of underserved the, hey, opportunities are created when you’re grateful for sure. No doubt about it. But also when you’re out there swinging, when you’re working hard, like opportunities just kind of so-called fall in your lap.
So it’s important to be positive, think positive, have gratitude, all those things. There’s no doubt about it. But you can’t just sit on a couch and wait for something to happen either.
Aaron: Exactly. [Inaudible 00:39:24-00:39:41].
Mike: We’ve got a little bit of an audio issue here again, man. Sorry.
Aaron: [Inaudible 00:39:43]. We’ll live through it, I hope. Is that working now? Do we have it back up?
Mike: [Inaudible 00:39:50].
Aaron: Okay. There we go. Well, they say that’s the blessing of live, right?
Mike: Yeah. Yeah. Yeah. For those of you that are listening to the recorded version, we do these live now. We record them to FlipNerd elite members. You can learn more. If you go to flipnerd.com and click on the Join tab or the Training tab, you can join as an elite member. And you can get access to watch us record these live now. But this is the challenge with live. So anyway, Aaron, can you hear me?
Aaron: I can hear you fine. Yeah, I can hear you fine. You’re a little delayed. But I can still hear you. It’s like watching an old “Kung Fu” movie.
Mike: I don’t do any Kung Fu moves here. I don’t want to hurt anybody.
Aaron: Well, yeah, yeah, you don’t want to do that. You might break something.
Mike: Yeah. Yeah. Well, cool man. Hey, I appreciate you spending time with us today. This is good stuff, as they say.
Aaron: Absolutely my pleasure, man. Thank you for having me on.
Mike: Yeah. Yeah. And real fast, Aaron, so tell us one more time, if folks want to reach out to you, if they want to get ahold of you, where do they go?
Aaron: Just go to aaronbchapman.com. It should lead you right there. You can also go to aaron.chapman@snmc.com. I’m with Security National Mortgage Company.
Mike: Okay. Okay. Cool, man. Well, we’ll add those links down below the video here on FlipNerd.
Aaron: Perfect.
Mike: And anybody that wants to check them out, and we’ll add a couple more links of things that we talked about, as well. So Aaron, good to see you. Thanks for being with us today. Awesome. And everybody, thanks. This is episode number 365 with Aaron Chapman. I would encourage you to go watch other episodes we have. We have hundreds of episodes and a lot of great information and other great guests, as well. So thanks for listening to us or watching us. We appreciate you. And we’ll see you on another upcoming episode. Everybody, take care.
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