That was my first year and a half or so. But then that put food on the table. It allowed me to learn the business. I was really good at finding deals. I got to pick one little slice of the business and get good that. Fortunately, that was one of the more difficult parts of the business, as you know.  And so by doing that, I could then expand from there. 

I have a business partner who has been my business partner now for about 18 years. We started kind of partnering together. Neither one had a lot of money at the time. But we figured out ways that we would split up the task and we would start flipping houses where we would go out and find a private lender, somebody to loan us money on the property. Then we would buy it. Instead of assigning it to somebody else we would buy the property, manage the remodel project. That was the evolution. We were always flipping houses for the first three or four years just to make money because we didn’t have any reserves. Then we really couldn’t keep properties and had enough downpayment money for rentals yet, but that was our way of getting started. 

Robert Leonard  04:52

You mentioned that you’re mostly focused on single families and small multi-family, but you’ve been in the business for 18 years. From who I’ve talked to, that’s typically pretty unusual. I think a lot of people as they’ve been in real estate for so long, they tend to get into much larger deals, syndications, 100 unit apartment complexes. Why have you chosen not to go that route?

Chad Carson  05:12

I think it fits more my goal and my lifestyle. I did try to go that route a little bit. My business partner and I in 2007, we went to seminars. It was equivalent of reading BiggerPockets and listen to podcasts back in the day, where we would find other people who were really impressive. Wow, they’re doing hundreds of deals a year. They’re flipping houses and syndicating and doing all that for a year there. 

We tried to ramp up what we were doing as well. We invested a lot of money in marketing, and we were pretty successful on the whole. We had some people working with us, and we had a little team. We had people buying properties for us. We had, I think, 39 closings in 2007. And some of those are multiple properties. So we bought some multi-unit properties to keep, we flip a lot of properties. So we made some cash flow, we made some good rental buys. 

The problem was at the end of the year, we kind of stepped back and I credit my business partner with this more than me. We both sort of reflected on what we were doing. We were busy, and we were making all this progress and money. But we asked ourselves–why are we doing this business in the first place? We kind of lost sight of what we were trying to accomplish and whether this mechanism of going big really helped us accomplish what we wanted.  We actually did an exercise where we wrote down a piece of paper what are the things that matter to us? What would we do if money was not an issue? 

I wrote things down like “I would like to play pick up basketball in the middle of the day for two hours.” And I would like to go out the woods and hike and walk around. Once I met my wife, we got married that year. In fact, when I had discussions with her about it, we wanted to travel abroad, we wanted to kind of take long, slow trips to Latin America and to Spain and take siestas and have enjoyed life a little bit. But there was the balance of that. 

What I found when I wrote that list was some of those involved money. I did need money, but much more of a restriction was how much free time and flexibility that I have. And so for me, dialing back the business, and making sure the business is kind of the servant to your lifestyle and what your goals are, and not the other way around, became the priority for us. I’m not saying you can’t syndicate and have 10,000 units and have lifestyle as well. 

But what my experience has been, is in that pursuit of grow, grow, grow, grow, grow bigger, bigger, bigger, bigger, bigger, you lose a lot along the way. If you’re really ambitious, and you do really well, and in five or seven years, you sell out and you make millions of bucks, then you can enjoy the rest of your life, right? Well, that rarely happens exactly like that. A lot of people who do that end up saying I would rather go do it to start another business than just sit here and do nothing. 

I think going back to the main point of this was having fewer properties, smaller properties that are more flexible, that are a little bit more consistent, and not having to get big and have different structures and raise money from lots and lots and lots of other people. Keeping it simple. And it’s doing that repeatedly fit our lifestyle when we reverse-engineered it.

Robert Leonard  08:12

I think that’s one of the reasons why you and I have such a great relationship and why we have such great conversations because we both think that way. And for me, that’s been a big shift. Because when I first was graduating college all the way growing up through high school, and even in college, I just wanted to be a billionaire. It’s all I wanted. I think we’ve talked about this, I just wanted to make billions and billions of dollars, I wanted private jets, you know, I wanted all that. 

Then I stumbled on to you. And we started talking and even just life in general for me has evolved that I just realized that that’s not necessarily what’s important to me, and there’s a lot more to being able to do what I want with my time than there is just having all the money in the world. We talked about it before we started recording today, I’m going back to racing motocross, it’s one of the things that matters to me. If I have a billion-dollar business that I’m running, I’m not gonna be able to go ride dirtbikes every day. Like, I want to, 

Chad Carson  09:01

There’s a fine line. I mean, it’s not like we all have a recipe that works for every person. The recipe for Robert Leonard is a little bit different from Chad Carson, and every listener on this call has got a little bit different recipe for what that investing in business looks like. There are some people who are going to be able to manage the growth, they again, have 10,000 units kind of stuff and still do all that. And that’s great. 

I guess the message that really resonated with me, and I think a lot of other people think the same way is that try to have the smallest business necessary and the simplest business necessary that accomplishes your life goals, and whatever that is–build it. If you get bigger than that, at least acknowledge to yourself that this is just an ego thing. This is just me wanting to like, compete with all these other people and I just want to win. Like, that’s cool too. 

If you just want to win and be the best and be the biggest like, fine but just don’t frame it as that’s what you need to do to have this lifestyle, to live this amazing life but you do not need all that. You can have eight properties or three properties and live an amazing life. It will make a big impact on your family and your community. That “go small or go home” message is what I think more people need to hear, instead of the other way around.

Robert Leonard  10:09

If you decide you want to win and compete and be the biggest, that’s what you’re deciding what matters. So you’re just you’re making a conscious decision to decide what matters to you, and what do you want to spend your time doing. And in that case, that’s what you chose. 

Chad Carson  10:21

Exactly. 

Robert Leonard  10:22

And the same thing for me is like simplicity, that’s so important. It’s doing what matters. But also just simple is so much less stressful. And for me, like I was the type of guy that would, if I could earn $50 by opening a savings account depositing $1000, I would go do it. For me, that’s not worth it to me anymore. The complexity there is not worth it. I like simplicity. And it’s the same thing with you know, building a business.

Chad Carson  10:48

Yeah, behind the scenes of businesses and real estate, I think is not talked about enough. It’s not as exciting to talk about the bookkeeping systems and the administrative stuff and the people you need to hire, and the issues, you’re gonna have behind the scenes of a big business. That’s not as exciting as, hey, I built this big, multi-million dollar business, and I’m making all this revenue. 

There are always fires, and there’s always complication behind the scenes. If the business matters to you, and this goes back to why you’re doing in the first place, if it’s accomplishing your goals, and it’s fun, you’ll deal with all those little things behind the scenes. 

But to your point like that complexity, and those aggravations behind the scenes, if you’re doing it just for a temporary high, like, it’s just like getting a little dopamine fix by going a little bit bigger, that’s not gonna last. You gotta build something because it’s not as easy to get out of a business or get out of a real estate property as it is to get into it. So you got to be really thoughtful about that, and not outrun your motivation, because then you get stuck in something that is like an albatross around the neck and is weighing you down as keeping you for decades, maybe from doing things that you thought were important when you were younger, and now you’re not doing them.

Robert Leonard  11:58

You are one of the few people in the real estate space that I’ve talked to that actually also believes in stock investing. Typically everybody in the real estate space is, you know, tsk tik, to stock investing, but you’re one of the people that aligns with me, and that you should have exposure to both. So you’ll understand my next analogy, but it’s the same thing for stock investing, I used to love picking every single individual stock. And I still do that. But I’ve done it a lot more simple. I do a lot of index funds now. And I just pick companies, that is a more simple process for me, like I’m not chasing Tesla, I’m not chasing GameStop, which is going crazy right now. Like I’m not going after all these super complex options, strategies that a lot of millennials are after. I’m really focused on simplicity, what’s really gonna align with my core values and doing what matters for me. 

Chad Carson  12:43

Yeah, I’m certainly in the same philosophy. I’ve learned a lot from your philosophy and what you teach about balance and different types of investing. My own stock investing strategy is primarily my retirement accounts. That’s kind of it for me. I just want to kind of set it and forget it. So I would love to own one index fund, and then that’s it. 

Stock investing for me, in my order of priority, is like the next level backup to the backup. My real estate is first, or maybe my entrepreneurial ventures when I’m doing them, that’s kind of the first level of income, then real estate income, and then the wealth that the real estate’s growing. Then for me, stock investing, and maybe some other type of assets, eventually are a diversification. 

So if that’s the priority of those, then I really don’t want to spend all my time messing with them and balancing them. The simpler that can be, the better. It actually turns out, I mean, you probably can speak to this better than I can. But most of the statistics I’ve read that that actually is probably going to be better in the long run anyway. The performance of your basic little index fund without you messing with it is gonna do just as well, and you’re gonna have lower fees than any other strategy. I kind of take good consolation in that the surplus is also pretty effective.

Robert Leonard  13:56

From conversations we’ve had both on the podcast and offline, I know that your portfolio has a bit of exposure to student rentals, and just a little piece of Airbnbs. Those are two parts of the real estate market that have probably been hit the hardest from COVID. How are you managing students not being at school? Did you have a lot of students breaking their leases or just not renewing them?

Chad Carson  14:20

Well, we do have a lot of exposure to student rentals. That’s a big chunk of what we do. It’s not 100% but it’s over 50% of our real estate investing rentals. I’ll tell you back in March of 2020, I was a little anxious. You can ask my wife she would say she went to the store, we were good. Our incomes fine. But I think my reflex is that when things go bad, I’m like, bury down the hatches, save every bit of cash. Again,  I was gonna get a little irrational at that moment. I was just telling my wife, don’t buy that $100 thing in the store or whatever it is, just take it easy. It was because I was a little worried that what we had is something we hadn’t seen before all over the country. 

But just particularly with student rentals and college rentals, you know, are they going to come back to school? Like, if people are 100% online or 99%? online? Will they come and rent an apartment? This is what we do-we rent apartments to students. That’s an open question. My business partner and I, we’re kind of worst-case thinkers when it comes to investing. All right, how much cash are we going to have to save if nobody comes back to school for the next 12 months, starting in August? That’s what we started thinking about. We actually went through the exercises of, Okay, maybe we can rent 25% of our units just to some people who are local investors, but we’re going to compete with everybody else who’s also doing that.  

So we were just doing some really negative cash flow scenarios, thinking about how much cash we need to set aside. And that was a pretty harrowing kind of future exercise I think about at the same time, none of that turned out to be the case. The way it actually happened, was Clemson University where I am with, was sort of a hybrid example. They asked students to come back, they had some labs that they can do safely in person. But from talking to a lot of our tenants and professors here in town, almost everything’s been online. And yet, most of the students still came back. 

My hypothesis is that a lot of them came back, because they just want to get out of their house from their parents, and maybe their parents could afford to let them do that. And it’s not enough money to pay for bills, or they had some reserves, or they had a job that they still are working. But we really didn’t have them and we lost some big missing vacancy, we lost some rent. So it wasn’t 100% as good as it could have been. But I mean, in the big picture, it was nothing close to what we thought it would be with student rentals. But it was a harrowing kind of experience in that it makes you realize how much exposure you have. When you have a negative situation like that, you realize where your vulnerabilities are. And that’s that was one of ours. 

Robert Leonard  16:51

When March hit thankfully, my portfolio is not really exposed to student rentals or Airbnbs, it’s pretty stable for the most part. So in March, I personally wasn’t too concerned. But there were a few people that popped right in my mind. You were one of them, because of your exposure to student rentals. Kirk Du Plessis was another one I know; he has some exposure to Airbnb and just a couple of other investors that I know personally that have some exposure to Airbnb. So I was thinking about you guys. As that was happening, I was curious, I couldn’t wait to catch up with everyone to learn about, you know how things were going. So it’s really interesting to hear how it’s all played out.

Chad Carson  17:26

The important thing for me now is that we’ve gotten through this. Don’t let that kind of experience go to waste. So it’s sort of accelerated some of my thoughts about diversification, which has always been a philosophy of mine. But you know, real estate’s a big slow-moving ship, for better or worse. You don’t just press a button, then tomorrow, you can diversify between 75%, US stock and 25% International. It’s pretty easy to do that with liquid assets. Real estate takes a little bit more thought and thoughtfulness. It;s always been in the back of my mind and our business partner’s mind that we want to spread out a little bit.  

So it just shows you there are different times, different situations that are pretty unpredictable, and different parts of your portfolio are going to be better than others. You want to diversify in as many different ways as you can: location, economic level source of income. I don’t need everybody who works in the same factory or everybody who goes to the same school. And then also asset classes, let’s get a little bit more exposure to different types of assets, including equities. 

As we just talked about, listening to The Investor’s Podcast, they’ve got me a little bit on the Bitcoin train. So I’m not going to go all in on that, but I’m getting a little bit so I think it’s smart to have exposure and the more (inaudible) your net worth is especially to try to diversify some and not have one thing can take your ship.

Robert Leonard  18:56

Yeah, I have to say I got a little bit lucky, I had Preston Pysh, and Pomp, two powerhouses in the Bitcoin space on my other show Millennial Investing in March. It was convincing enough, both the conversations, those two guys are so brilliant that I decided to allocate about 1% of my portfolio to it. Super small. Again, going back to simplicity, I didn’t want to worry about it. I don’t want to lose sleep at night. I believed in it because of what they told me but, I didn’t know enough to really go all in so I put 1% of my portfolio, but I got it at like $4,500 or so. So today it’s done great. But again, a small, small piece of my portfolio.

Chad Carson  19:30

Consult with people like me who bought at $34,000. So there you go. 

Robert Leonard  19:34

There was already a trend to online learning for colleges. Now COVID has accelerated that. And I think the future of online learning, or just on-campus learning was just a little bit unclear. There are so many other avenues that people can use to learn. People might not be going to college as much. How are you viewing student rentals long-term? And you just mentioned diversification. So are you looking to sell some of your student rentals and get into different types of assets?

Chad Carson  20:04

So I’m still logged on my college student rentals. In particular, the college that I’m at Clemson University, I think college is going to be pressured. In-person learning is going to be pressured, which is everything that technology is affecting. I don’t think anything is immune from the way technology has affected things. [With] online learning and technology, the fact that information is free is definitely going to impact it. But I think there’s still value. There’s value in relationships, there’s value in learning face to face. I think there’s value in coming-of-age experiences. But you know, I think the network effect of just relationships with people is really hard to underestimate. 

Like, I’m in the state of South Carolina, for example, Clemson is a really good school, some of the top academic performers in high school try to go. They’re also kind of nationalized, become more like that. So if you graduate from Clemson, and you get into whatever profession you are in South Carolina, around the country, you have connections with these people, that means more sometimes than the actual stuff you learned in school. 

I don’t know what the value of that is, but it’s made me think about why University is valuable? Is it? Is it worth the prices that is pointing to? I don’t think so. I think universities are gonna have to [inaudible], and that’s a good thing. They’re being challenged. So I am selling some properties in a small way. But it’s not because I’m not excited about colleges anymore, my college in particular. It’s more what we could talk about earlier, I just think we all need to have some diversification. We need a little bit more of that. 

It’s also just, we’ve got a constant process of printing our portfolio. I got this from John Schaub, who wrote the book “Building Wealth One House at a Time”. He would look at his portfolio every year, and rank them based on several criteria that are important to him. Some of those are cash flow, wealth building, but so is hassle. Then, are there big maintenance issues and things that are recurring on this property. So you cull your herd a little bit by selling off some of the ones that are the bad performers. Or maybe we don’t have a lot of bad performance now, but just not your best. Selling that and maybe doing a 1031 exchange into a new construction property or something different, that’s kind of what we’re playing around with. We’re dabbling in a little bit of new construction rental, we’re doing some lending to other investors who are in a little different niches than we are. So I think all of that’s part of our plan for the reason we’re distributing some of our capital to different places.

Robert Leonard  22:24

One of the other interesting dynamics with your student rentals, in particular, I think, with Clemson is the athletic program that’s there. Mostly football, but others as well. I think if you have colleges that have no athletics or not superior athletics, I think those colleges are going to perform differently into the future than a program like Clemson who has a top tier football program. I think people are gonna be drawn to Clemson for athletics and for various other things that you mentioned. Whereas with schools that can’t offer those and are strictly just going for education, I think those two types of colleges are going to fare different and I think you’re going to be on the better of the two sides with a school that has great athletics.

Chad Carson  23:03

There’s no doubt Clemson has been positively affected academically because of the marketing of the football program. And that helps a lot. If you think about it, they get paid to promote their school. It’s pretty ingenious way of bringing in your top academic people as well. This is something that’s not intuitive all the time. How can football help the chemistry department? 

Well actually, at least, in this case, it has helped. if you market it well, Dabo Swinney. I’m a fan I played football at Clemson and I think they run their program in the right way. You make sure your players graduate, you make sure they try to set good examples in the community. Then you can use football as one thing, but life and these life lessons of these players are getting can be a model and kind of a part of what comes to drive the market itself. So I think universities are turning more into businesses,  that they have to raise money, they have to promote themselves. So football athletics are one way to promote. 

Robert Leonard  23:58

I mentioned before you also had a small exposure to Airbnbs in your portfolio. I’ve heard from some investors that their Airbnb properties have done great and from some articles I’ve read online, other investors aren’t doing so great. They’re getting pretty crushed. How have your Airbnb properties held up during the pandemic?

Chad Carson  24:18

Yeah, so last time you and I talked, we had two Airbnbs. One is actually just my basement apartment. We have an apartment that I felt like going back to simplicity was just extra space. My wife and I talked about it and I used to have an office down there. We moved to an 1100 square foot apartment in Ecuador for a year and a half. We came back to this place that was 1900 square feet upstairs and had the 700 square foot basement apartment and it felt like why don’t we just do something with this? We remodeled it and rented it out. 

It just happened that Clemson because of the football games, you could do an Airbnb rental, where 80,000 or 90,000 people come into town they swamp all the hotels. So people want to stay in Airbnbs and we rented it like that for a year. Well it just so happens that there are no football games this year. There was limited attendance. There was not the same excitement. So our Airbnb in our basement sat vacant, the entire year. We didn’t didn’t get any rentals. 

It’s our house is not that big a deal. It’s kind of supplemental income. But in other cases, actually, we have a manager who manages our Airbnb rental for us. He has other properties on the lake, and out in the woods, those have done better than they’ve ever done. It’s been the local retreat type thing where people can’t fly somewhere else, they can’t go across the country. So they’re looking for novel vacation experiences where you can be sheltered in place. 

All my friends who have those type of Airbnb, or vacation rental by owner type things have done better than they’ve ever done, Stays keeping things full all the time. Again, that’s another interesting thing, who would have known the impacts of a pandemic on vacation rentals? Mine has done horribly, because it’s a game day entertainment-based rental. For the vacation go off on your own in the woods, God, things have been amazing. I don’t think you’d want to have all one or the other, you want to have a little bit more exposure to both.

Robert Leonard  26:02

I think a lot of people think of Airbnbs and they just instantly think of downtown New York City Airbnb or Chicago or Denver, whatever it might be. Those Airbnbs are probably struggling a little bit if I had to guess just because of the location. But if you get to the types of Airbnbs that are less susceptible, I guess you could say to COVID, you know, out in the woods, those types of things, like you mentioned, I would gather that those will probably continue to do well.

Chad Carson  26:29

Yeah. But it’s interesting that the beachfront property is something. So they’re doing well right now because people go to the beach and hang out, walk on the beach by themselves. But then you have a hurricane. And what happens to those? It’s such a lesson. This whole experience to me, has been sort of like a real-life wake up to like a Nassim Taleb type lesson, you know?  Black Swans, but also unpredictability and just you cannot predict this game. I mean, this thing is there’s too is too complex of an equation. 

So the only logical approach is to be anti-fragile. It’s to not build your finances, build your business, such that you can respond to all sorts of different things. You can have a low center of gravity and move different directions. I think that’s another reason for being small, I heard conversation earlier, you get so big and grow so fast, you are actually very fragile because your cash flow is being reinvested in things, you’re probably not as well-capitalized, or sometimes that’s the case. You’re also focused on one destination. If you can’t be nimble, and move around like a lot of small investors can, this type of thing can wipe you out if you happen to be in the wrong part of the economy or the wrong thing that happens.

Robert Leonard  27:37

How are you approaching Airbnbs going forward as you diversify your portfolio? Are you considering adding some more of them?

Chad Carson  27:45

Maybe, yeah. This kind of fits in with my overall strategy that my business partner and I are trying to do. Our personal time is maxed out, like I do my own podcast, I make YouTube videos, I teach classes, I love doing that. I have a local nonprofit, I’m kind of getting interested in doing some more like social businesses locally to see how I can help there with my own community. With my family and kind of normal stuff, I’m maxed out. I really don’t want to use a lot of my own time in real estate investing businesses. So I would be open to doing Airbnb, other things, if there’s a partner on the ground, I want somebody who owns that deal, and then will be the lender, or will be the limited partner with that person. The same with flips. The same with even student rentals. 

These days, we are kind of shifting our mentality a little bit to be the venture capitalists of the real estate world, instead of being the person receiving the venture capital, which we were for the entire time of our business before.  This is a new skill set. I’m having to learn a lot. I’m having to take courses on that, on being an asset manager, on thinking about how to evaluate people, and how to evaluate the deal from that perspective, and how do you manage your portfolio from that perspective. 

So that’s been kind of fun, just to think about the different types of investments like Airbnb. That’s important, but I think the person themselves is like, that’s my first. I’m a relationship business-driven person. So I want to know, I’m gonna invest in that person, are they gonna be trustworthy? Are they going to do what they said they’re going to do? Because really, if we get one of these weird things, where, you know, their Airbnb gets wiped out for six months, I want to see how they’re going to respond when that happens. So are they gonna quit and just leave me with a bag? Are they gonna actually follow through and be flexible, and we have to shift their payments. 

That’s the kind of person I’m looking for. Because that’s what my business partner and I worked for our investors back in 2008, 2009. We didn’t panic, we were nervous that the economy was changing, but we communicated with our investors, we stuck with it, we shifted our strategies. So for those of you out there who are borrowing, looking for money, you’ve got to demonstrate that you’re that type of person to an investor. And if you do, you’ll get as much money as you need. Really.

Robert Leonard  29:49

That’s all actually really valuable for me to hear right now. I haven’t raised any money yet, but I think I might start to in the next year or two for some of the deals that I want to do. Again, I’m gonna keep it simple, so I’m not gonna make it super complex. I’m not gonna get into massive syndications. But I think I’m going to start doing some more JVs–joint ventures for those who don’t know what a JV is. But on a smaller scale with outside money. So those are really important, valuable pieces of advice for even me personally, and for anybody listening that is going to go down that same route.  

We’ve talked in the past about how we mentioned it a little bit earlier about how we both tend to try and look at real estate investing, similar to how Warren Buffett approaches stock investing. Typically, it’s a little bit more conservative, and always with a margin of safety. I know you also tend to not have a ton of debt on your portfolio. You mentioned that to me, I think in our last episode, and that was even before the pandemic. How do you think these types of principles and strategies have helped you weather the storm that we’ve experienced from the pandemic? How do you think they’ll help you as the real estate market evolves after COVID?

Chad Carson  30:54

I think just that mindset of value investing has been one of the most helpful frame of minds that I’ve had. I’ve studied all sorts of different investing practitioners and teachers. I often come back to Warren Buffett. It’s not that he has direct lessons on how to buy a property in a duplex and house hack, something like that. Every once in a while he’ll write about that manual letters, which I think is kind of cool. It will give an analogy of buying a farm and how that compares to buying gold and how much better a farm is than a gold investment. So he does talk about it. 

But I think if you look at some of the core principles of Warren Buffett, but also other long term thinking value investors, they focus on risk and making sure you don’t lose. Right? That’s Warren Buffett’s number one rule in investing, I guess. What’s rule number one? Don’t lose money. What’s rule number two? Don’t forget about rule number one. That can apply in a lot of different ways. 

In real estate, I think it’s the number one way I’ve seen people go out of business is their financing and their cash reserves. So let me explain each of those. The financing, I had a couple people I know who went out of business in 2007/2008/2009. That same time, we were having to go through a lot as young investors. The reason they did was they had financing that had terms that required them to go get more financing, right in the worst recession we’ve had in a long time. 

So if you had to look at some principles of financing, the best kind of financing you can get, and you have to get it as long-term fixed financing. So if you can get 30-year fixed financing at 3%, right now, and you’re a young investor who’s growing your portfolio, that’s smart. That’s really good. I think you should do as much of that as you can within reason within your game plan. So we’ve done that, but we’ve had no problem getting financing like that, in fact, we still have some seller financing at low interest rates and some other private financing. That’s part of the story. 

The other part though, is if you’re going to use some debts and leverage, you’ve got to have a really resilient cash position. So we’ve tried to maintain a lot of cash. That really served us well, in 2007 and 2008. We had to lean on that because we made some mistakes leading up to there. We had to actually eat into our reserves to pay for repairs that we underestimated, to pay for negative cash flow and some properties to pay for turnover. So it’s for those unknowns, that cash really comes into play. 

And so if you combine that, you can use some safe leverage, you can have some cash, set aside good robust cash reserves. Those are kind of applications of that lesson for me from Warren Buffett, to have that kind of worst-case scenario, first outlook. Then if you do that, I think you are going to be anti-fragile. You’re going to be able to be resilient. And over time, my goal has been to pay off some of that debt as well, just because why? You know why try to keep growing? Why not pay off some debt, increase your cash flow, reduce risk, even more. 

I guess I am low debt philosophy. But we definitely have that. I think Warren Buffett is good as he’s used leverage his entire career to use float from insurance, which is a very low-risk form of leverage, kind of like a 30 year fixed mortgage, as a really low-risk form of debt as well. It’s not a bad thing to use it. It can just be having a healthy respect for it and knowing that it can take you out if you’re not careful. I think is the approach that Warren Buffett would advise.

Robert Leonard  34:04

I think that’s probably one of the biggest things that new value investors misinterpret about Buffett, and I’m speaking from experience here, because this is exactly what I did was when I started studying Warren Buffett. I thought that I needed to pick stocks like him and find out exactly how he analyzes financial statements, and do everything that he’s doing exactly how he is to be successful. I can and then as I’ve studied him more and evolved and talked to people like you and learned on the podcast, I’ve realized that Buffett is a lot more valuable to us as his principles than he is learning how to pick individual stocks. So I think if you can take what Buffett teaches principle-wise and apply it to your life, I think that’s a lot more impactful than it is to just copy his stock picks or how he runs his business or whatever it may be.

Chad Carson  34:48

I agree. I was listening to a recent interview. I’m trying to remember who he was talking about. It might have been on The Investors Podcast that he was talking about what makes Warren Buffett beyond just the one we just talked about? Risk-averse and margin of safety. 

He also has a lot of lessons for us as real estate investors from just how he works with people. Like he runs this big conglomerate. He outsources it, trusts people with the responsibilities that they have when they run the corporation. And so that’s kind of where we are now too. We’re gonna loan money to somebody, if we’re going to invest in them, and their business is this operator, we’ve got to trust them. Like, we need to pick only people who we believe with very, very good trust, we feel comfortable that they will do what they said they’re going to do, that they’re competent, that we don’t have to block every single thing they do that, yes, we look at the financials and make sure things are working. 

That’s a recipe for building a really good business is that human trust like that, the speed of trust, how valuable that is, that was a lesson until this year, I really didn’t grasp from Buffett. And yet, it’s maybe one of his most impressive feats is to be a delegator, who surrounds himself with really incredible people, and then entrusts them with his responsibilities with his capital and says, hey, go do it. Those people tend to rise to the occasion if you pick the right ones. 

Robert Leonard  36:04

People always think of Buffett as a great asset allocator, when it comes to picking stocks, which, of course he is, look at the track record. But outside of that, he’s a great asset allocator, when it comes to people in those types of things, as well. And that’s not necessarily as considered for a lot of people, they don’t think of that as being an asset allocation. But it really is,

Chad Carson  36:24

Yeah, being a judge of character and being able to weed out the ones who probably shouldn’t mess with that person shouldn’t deal with them. And then when you do find the ones who are like gold, invest in that person.I think about that, whether it’s a contractor; 1% of the contractors who work whether it is awesome, and you need to just go with that person and stick with them and pay him what they’re worth. 

Same with property managers, same with tenants, you know, tenants, or you can look at him a lot like an employee, like, they are the people who are the most important part of your business. If they, they can be a self-managing person, somebody who is responsible and pays their bills on time and can handle that you can even give them lists that here’s my plumber, here’s my electrician, and here’s this person, if something comes up, just call the call this name. And if it’s something weird, you can call me, don’t worry about it. 

But if you have a responsible tenant who wants to stay for a long time, they could be there for 10 years, you can make a lot of money, they can be very happy, they can self manage themselves a little bit. Everybody can be happy. Isn’t that amazing? Just by empowering that person, and giving them a property that allows them to do that.

Robert Leonard  37:27

There are a lot of people that listen to the show that haven’t bought their first property yet, but they’re eager to. Or they’re still relatively new, they’ve acquired one, maybe two properties. How should they be approaching this market? Should they consider sitting on the sidelines a bit longer to see how things play out, or is now still a good time to get started?

Chad Carson  37:45

I think it’s always a good time. I think there are ups and downs in terms of how abundant opportunities are, like if you were investing, and you just happen to get in 2008/2009/2010, you just got lucky. Good for you, you know, there was just an amazing number of deals. But the rest of history, you’re not always going to have those opportunities. 

So I’m more of dollar-cost averaging within real estate philosophy. I just think you should always always be buying. You can be more strict on your criteria. Right now, we’re not really that excited about buying anything new. But if a great deal in our market or another market plopped down on our desk, we would look at it. We’re always a buyer, because we would sell something else. We would sell this other property we don’t like as much and replace it with this one. 

So I think if you’re a new investor, the key is to get really clear on a couple of things, your target market, right? Where are you investing, where’s the place and try to focus as much as you can, don’t try to be really broad with that. Get really, really focused on one area that you can learn to be very knowledgeable about. Then within that market, try to focus on one strategy like it was house hacking, go with house hacking. If it’s buying a turnkey rental, buy a turnkey rental. If it is a live-in flip, do that live-in flip.  Plan to get really good at that market get really good at that strategy, focus, focus, focus. 

What you’ll find is that when you get that focus, opportunities start showing themselves. That’s just the nature of it. I really do believe this, that although the markets change, there’s competition, there are always opportunities. If you keep looking, there’s always another deal. And the reason that’s true is that there’s a lot of people who just look at and are kind of sorta in it. But if you’re all in, if you’re committed, if you’re willing to buy, to prepare yourself to buy, there’s always going to be another deal. You might miss one particular deal, but there’s always the next deal and then another. So just take that attitude that you’re there, opportunities out there.  Always be buying, have your criteria set, then now is still a good time to buy. I don’t think that’s going to change.

Robert Leonard  39:46

For a new investor that is just getting started with rentals specifically, what are some of the most important numbers for them to be aware of and make sure that they fully understand? Which ones do you personally focus on?

Chad Carson  39:57

I think the most important number in real estate for rentals, in particular, is net operating income. If you are a stock investor, you get really good at looking at the earnings of a company and how those earnings are related to the price that you’re paying for a company. Well, in rental properties, the net operating income is just, you can think about the profit and loss of a rental property, you’re taking the rent, you’re subtracting all of the operating expenses. You’re leaving out the debt for the time being, not including how much that’s gonna cost. You’re just looking at what is this property by itself without any capital allocated to it yet, how much income does that property produce? 

That’s such an important number because even if you’re not in a cash flow, tight market, in quotation marks, even if you’re buying in a growth market, or when they don’t, they don’t produce a lot of cash flow, that rental income is what you use to pay your mortgage. That’s important. That’s how you survive. That’s how you can hold through different markets. So knowing really closely what that net operating income number is, if it let’s say it’s $1,000 a month. You have $1500 in rent, you subtract all your operating expenses, and you have $1,000 leftover. You now know that that $1,000 is what you have to use to pay your mortgage to pay yourself in a cash flow. 

That’s as important as it gets in rental property investing, you can get complicated and throw all the other things out there. But if you look at that number, you can then add in your financing costs. You can add in your cash on cash, return goals and all that. But it really just starts with that kind of basics of cash flow on a rental property.

Robert Leonard  41:25

When you think back on your life, whether it be personally or business-related, real estate related, what piece of advice have you received that has really had an impact on you, and you continue to use it and think of it to this day?

Chad Carson  41:39

That’s a good question. I think of John Wooden actually. He’s a basketball coach Hall of Famer at UCLA back in the day. I’ve just always been impressed with his approach to success. He defined success a little different than I think people think about it these days, you know, the Instagram, social media kind of success and driving the cars. He was a really successful by outward standards, basketball coach. His teams won more games than almost anybody in his era, I think they won eight or nine out of 11 National Championships in a row. They went like a couple of years in a row, never losing a game like this is unbelievable. 

The interesting thing was his definition of success never had anything to do with wins or losses. If he were a real estate investor, it would not have anything to do with building wealth, or making money. What he focused on was the little things just that he would have his players come into practice before a season. About a day or two before they start practicing, he would have them practice putting on their shoes and tying their shoes and putting on their socks. 

So I think that story, that piece of advice, just put on your socks, just tie your shoes, and do that with excellence. This also reminds me like the ancient Greeks. Aristotle and the other philosophers back then had an idea that human excellence they call it Arete. That was the best, most important thing. If somebody lived with Arete, if they tie their shoes with excellence. If they were a janitor, then they swept their floor with excellence. They were a real estate investor and they bought properties with excellence. Nothing else is really guaranteed, except for what you give to that situation. 

That lesson to me when I heard from John Wooden, when I’ve heard it kind of echoed through other wisdom, ancient philosophers and different people, and it’s just really had an amazing impact on me, because it’s so widely applicable, whether you’re a parent, whether you’re an investor, whether you’re a football player, like I used to do. You’re here on Earth, what are you going to do with it? What do you do this opportunity you have? So that’s kind of a core philosophy and aspiration for me. Not saying I always do that, but it’s been an aspiration to see: How good can I be at being Chad today? I can do the best I can, put my shoes on, tie my shoes the best I can, and then move on to the next thing.

Robert Leonard  43:59

One of those reasons why in Wooden’s example, putting your shoes and socks on is so important is because if you don’t do those things, right, correct me if I’m wrong, Chad, but I believe this is his philosophy is if you don’t do those two things right, you might get a blister, you might roll your ankle, something might happen in practice, and then guess what you can’t practice. And if you don’t practice, you’re not going to perform well in the game. Or you might get hurt. You can’t even play in the game. So if you don’t start by doing those small things right, you’re not going to get to even participate or do the angle. 

Chad Carson  44:28

Exactly. Yeah. It’s just like the little things are everything. You can take that into that two different ways. You can be obsessed and always worried about all that you know everything all the time. Or you can say, I have an opportunity in this moment. Not to worry about tomorrow, not to worry about yesterday. This moment is what matters. How prepared can I be? If I’m going to go buy a property, how prepared can I be like I have control over studying my market I have control over doing these things. 

That’s really what it comes down to. There’s some things we can control. Some things we can’t. Going back to your beginner real estate investor kind of mindset right now. Should I invest right now or not? We have no control over the market, the Federal Reserve and what they do. We don’t have any control over that. Whether the Coronavirus vaccine works in a month or nine months, we have no control over that. We do have control over though some things like our mindset or attitude, how we approach the situation. 

Those little things lead to big things, both negative and positive. The blister, they put their shoes on incorrectly, and they put their socks on incorrectly, they do get a blister, and they do miss practice. And they are now performing an 80% of their capability to game instead of 100%. And guess what, they’re not going to win games, and they’re not gonna win championships now. So it all comes back to that this is really everything. This is how you approach whatever role you have in life with excellence or not. And the good news is like, you could have screwed up everything up to this moment. But you now have the opportunity right now, to try to do it with excellence right now. 

That, to me, is really hopeful, really encouraging, because it’s a forward, present moment looking. But also you learn from the past, but you don’t have to dwell on it. You don’t have to say, beat yourself up about it. It’s like, Alright, right now, what can I do? How can I move forward? How can I be better? That’s the kind of lesson I think about this as a parent, like, what can I convey to my kids? That’s the kind of thing that I hope they take more from my example, than the words that I gotta listen to what I say probably it is kind of turn that off. But if you can try to be that way, the best you can, your kids, maybe pick up on that a little bit.

Robert Leonard  46:20

Chad, thanks so much for joining me again here on the show. For those listening, that are interested in learning more from you and want to connect with you. where’s the best place for them to go?

Chad Carson  46:30

Everything I do? www.coachcarson.com. That’s my website. I have a podcast called the Real Estate and Financial Independence Podcast. So if you like podcasts, I would love to hang out with you on there, kind of close friends and partners here with Robert hey, we’ve exchanged some people back and forth. I think kids if you like his show, hopefully, you’ll like what we talked about on the show each week. Some of it is me talking, I do some interviews as well. 

Lately, I’ve been doing a lot of like, looking over my shoulder as I coach a new investor or intermediate investor, kind of how to do the next step and a real deal. So we just have a lot of practical fun and focusing on financial independence on real estate. In addition to podcasts, I do a YouTube channel kind of focusing more on that to more for the tutorial type stuff. If you want to look over my shoulder in the draw out how to analyze a deal and do something that’s more my approach on the YouTube channel. But whatever works for you, I’d love to hang out with you to search for Coach Carson. 

Robert Leonard  47:23

And you’ll find that Chad’s absolutely right. If you guys like our content here at TIP, and here on my show, I know you’ll like his as well. So I’ll put a link to everything he’s working on in the show notes so you guys can go check that out. Chad, thanks so much.

Chad Carson  47:39

I enjoyed it. It’s always a pleasure, Robert. Thanks for having me.

Robert Leonard  47:41

Alright, guys, that’s all I had for this week’s episode of Real Estate 101. I’ll see you again next week.