Ep #310 – Jason Harris – $14 Million Real Estate Portfolio On the Side
Here is some of what you will learn:
How to double the amount of your loan qualification
Creative financing strategies for couples
Understanding the velocity of money
Tax strategies for better loan qualifications
Working Real Estate as a side gig
Common misconceptions about starting out with no money
Creative sources for backup reserve monies
Depreciation strategies
To learn more about our guests click here
Full Transcript Below:
Jason Harris – How to get Started with Real Estate on the Side (Ep310)
Intro: Hi! I’m Rod Khleif. Each and every week I record an interview with a thought leader that I know you’re gonna get a ton of value from. Now here on YouTube are the video versions of my podcast, Lifetime Cash Flow through Real Estate Investing. Now to make sure you get the latest information please subscribe and hit the notification bell. Let’s get started.
Rod: Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. And I know you’re going to enjoy the gentleman we’re interviewing today. His name is Jason Harris and he and his wife Kerri have built up a 14-million-dollar portfolio on the side. But what’s unique about their portfolio is it’s all Plexus which is really kind of cool. They have eighty-one units since all you know for the most part two to four units. So, we’re gonna dig into how he did that which I know will interest a lot of you that haven’t started yet and go from there. Welcome to the show brother.
Jason: Thanks Rod I appreciate it.
Rod: Let’s have some fun. So talk, you know talk about how you got started. You know maybe maybe why real estate? I knew you’re a financial planner but how you got started in and kind of bring us to present day.
Jason: Yeah. Thanks so curious my wife she and I started in 2010 we bought our first four plex using an FHA loan. We wanted to partner with her mom and dad who had a duplex only at the time and they were trying to take that into a 1031 exchange into a four plex. And I wanted to get in on that if I could. I had very little money but I was very eager and anxious. So, I took him to dinner had this big pitch on how I could add value and all of that. And they were kind enough to entertain the idea. But we found out later through their agent that her and I may be eligible to buy a property on our own and that’s when we learned about FHA, three and a half to 5 percent down. And I had about nineteen thousand dollars that I had saved up through school that I barely had enough to then close on our first four plex. Within about two months, we had already made up our nineteen thousand dollars at that time there was the first time homebuyer credit of eight thousand that we got back. And then through pro-rated rents and security deposits and a couple months without a mortgage payment we had already made back our 19 grand and I didn’t fell in love with real estate and thought okay this is something I need to figure out and do more of. And that’s how we got started.
Rod: So you that you moved into that first four plex then?
Jason: Correct. Yeah. We lived there and rent come from the other three units, paid our mortgage which helped us save a lot more than what we had been doing beforehand. We used that to improve the property and then also buy our next property which was a duplex in 2014. We didn’t realize at the time there were other strategies that could be used to acquire things more creatively and so we were just saving up as quickly as we could to then put a downpayment for the next property and so that’s what led us to 2014, we bought another duplex doing the same thing owner occupied it used a portfolio alone with 10 percent down and no PMI and from there got more creative, Carrie got her license and agreed to
Rod: Let me slow you down let me slow you down. So people that don’t understand what you just said understand. So but let me circle back to that fourplex for one second. You know what a lot of people don’t realize is if they have leases on the other units you’re able to utilize those to qualify to help you qualify. They used to think 75 percent of that income rent. And so you bought that first four plex you moved into it then you then in 2014 you bought a duplex and you did that one 10 percent down. And so that you didn’t have any PMI which is the is the mortgage insurance guys. That’s what he’s talking about there. All right. Please continue.
Jason: Yeah. And maybe I can add to that that the four plex for example that they do only count seventy five percent of the rental income. I have gone to the bank and only had been qualified for two hundred eighty thousand. But then I learned later that that rental income helped me be able to qualify through that four hundred and thirty five thousand dollars. Otherwise I wouldn’t have been able to do right.
Rod: Right. You can buy a lot more than you then. Then you’re able to qualify for on your own which is the whole reason I wanted to stop you there. So I’m really glad that we did. So guys you know don’t, you know if you can only qualify for a couple hundred grand you buy a four plex net you can double that amount. So awesome. And FHA has what’s called mortgage insurance and in it and it adds to your costs. So you were able to avoid that by putting 10 percent down I take it.
Jason: Correct. So you typically can only have one FHA loan at a time unless there’s some qualifying reason and for us at this point we did it. And so we’ve done a portfolio loan from a local bank and credit union who would allow us to owner occupy 10 percent down on a two unit or smaller property and so because we wanted to receive as much income from our primary residence as possible, we went with a duplex that was bigger, four bedroom three bath per side and use that income to offset most of the mortgage once again. And then we’re able to rent out the four plex unit that we had occupied as our
Rod: Got it. So only one FHA loan at a time. This is out of my wheelhouse now so I’m really glad you said that. So that explains the 10 percent down. Okay. And so you just you did a well your loan at a bank or you say Credit Union was it?
Jason: Yeah it was U.S. bank actually. Yep.
Rod: Okay awesome big national bank Wow. Okay so you bought a duplex and now you’ve got 81 units. What happened between then and now?
Jason: Well we got a little more creative and Carrie got involved and I think that helped us understand. You typically can only have 10 residential loans per person
Rod: For Fannie Mae.
Jason: Correct
Rod: Right. Let’s have a guideline right.
Jason: Yes. And we didn’t know any better but we were putting, Carrie and I on both of us on the loans ourselves. He was getting one loan I was getting one loan and we didn’t realize that that was counting for both of us. She wasn’t working at the time so she wasn’t really helping us any qualified for the property and so later we refinanced her off the loan we’re at 75 percent loan to value just in a regular conditional loan. And that gave us back an FHA loan but also allowed me to only count those two loans on me and not on her.
Rod: So that limitation doesn’t apply even to married couples if you do them individually?
Jason: Correct. Wow that’s interesting I didn’t know that myself. So effectively you could have 20 loans between the two of you if you both have enough income to qualify.
Jason: And so we’ve got a unique way Rod. Well I have 10 loans in my name. All residential and we’ve shifted everything so that anything that’s negative from a debt to income perspective, we put those loans in my name. So now Carrie we can make her income as strong as possible so she can get her own set of 10. And so that’s how we’ve acquired two units here, four units there and it’s continued all to flow.
Rod: So just just guys, just so I want to make sure you caught what he just said okay. And when you’re working like he’s doing on these smaller properties you know, there’s positioning involved and you’re basically positioning yourself in the most positive light for financing. And so you know like you said you take those underperforming properties you put them in one person’s names while the other person is qualifying for you know for additional acquisitions that’s brilliant buddy I’ve done it myself as brilliant okay
Jason: No, thank you. I think that’s when things clicked for us. We were putting five to 10 percent down every time because we were young family owner occupied the units and we realized that if Carrie was the agent helping us acquire these properties I could let her still stay at home with the kids but make an income on the side and every time I purchase something, we’re improving her income so that in the future she now has income on our tax returns which would allow her to then qualify for her own set of loans and so over the next few years we continue to purchase property. And every time I bought something that may Carrie income
Rod: I just said guys we want to be clear, she got a real estate license right? And so she’s an agent. So she gets a commission and so yeah I love it. So every property you buy creates income for her to help her qualify down the road. Absolutely. See you guys. I want to circle back to so. They get everything we’re saying here and so. And I’ve done the same thing. Absolutely the same thing. You know purchase hundreds of houses in Denver and I was a real estate broker and in fact back in the day, I’ll just digress for a minute. VA used to offer houses that were in foreclosure and I would get a commission on them and you could investors could buy them. So not only do I get a commission I could actually buy them. It was a beautiful thing. I wish those would come back. But so you’re basically you know capitalizing on all these different aspects. You know the Fannie Mae limit, the the income from your deals, so you not only you know is that helping her qualify but it’s also reducing the amount of money you’re paying for these properties. So that’s a nice strategy where we’re a married couple one of the people has a real estate license love it. And that would be the only reason I get by the way I get asked all the time should I get my real estate license? I say no because what it does is it. It actually raises your accountability to another level. You’re held to a higher standard. And there’s just no benefit unless you’re actually going to sell real estate. Well this would be the one example where I would where I would say yes absolutely it makes sense because but if you’re just going to invest for yourself and you don’t have a spouse then I wouldn’t do it. But in your case it’s brilliant.
Jason: I concur with all that that you said Rod. It’s interesting because we were young I would say struggling but we didn’t make a lot of money but through these types of strategies, we were able to build up Carrie’s income to a pretty sufficient amount where she actually makes more money than I do now because of the volume of properties we purchase and because now we’re recognized by many in our area of people who understand how to acquire investment property and so she has started to represent over the last couple of years.
Rod: Sure. Sure. So it’s given her some notoriety love it. So let’s talk about how you’re finding deals you know. Are you still able to find deals and what are some strategies you’ve used to find these plexes?
Jason: You know that’s been real difficult Rod. It’s becoming harder and harder. There’s been limited inventory but we’ve found kind of areas that we really like that we already own property in or that tend to cash flow better than maybe other areas. And so my wife and I’ve actually doorknocked those neighborhoods. We’ve others out to doorknock them and just paid them for their time. We’ve done mailing campaigns where we’ve targeted those specific areas that if I know they’re in that zip code or neighborhood I’m going to be interested in buying their property. Once again Rod going back to, if I can find it off market I may be able to negotiate a buyer’s agent commission of 5-6 percent and that’s not going to be any less to the seller because they’d have to do that anyways. I think when you’re younger and you don’t make a lot of money it took us four years from 2010 to get our next property in 2014. The velocity of money concept was slow and we wanted to find a way to accelerate that where we could take the capital we’ve put into the property and get it out faster so that we could go and repeat that deal over and over again. And so as we were able to get more creative and start getting higher commissions, we had less of our money tied up into each property which then allowed us to go repeat, repeat ,repeat and sell to the last four years is where we’ve really seen a lot of acceleration to.
Rod: Well let let me let me enhance what you just said because you know as far as the velocity money actually let me circle back for one second because I want to circle back to what you said about doorknocking and mailing. Guys, those are examples of doing what other people aren’t willing to do. And any time you do it other people aren’t willing to do you’ll be a success. I mean that’s how I bought hundreds of houses in Denver knocking on doors of people who were in foreclosure. I’ve got a coaching student right now, Matt, that you know got a list of the people in his community that owned for 20 years, found the people that don’t live locally and knocked on doors and he’s bought three 6 plex an 8 plex and now another six plex that way just by knocking on the doors and saying hey do you own that property over on X Y Z Street. Now he owns them. So you know mailers of course work but so I want to hammer that point home. Don’t be afraid to do what other people aren’t willing to do because that’s how you know you become successful. But the second thing as far as the velocity of money I know that you know you become creative but and that’s why you’ve you’re up to eighty one units and I will tell you it’s not just being creative it’s also enhancing or expanding your personal financial. Kind of what’s the word I’m looking for the box that we put ourselves in financially being willing to go larger and larger but also didn’t you tell me that you know that you’re also now bringing in partners that if you don’t have the money you bring in somebody to put up the money, get the financing, and split the deal?
Jason: Yeah absolutely. So we talked about a little bit I’ve hit my 10 loans they made was allowing me to half and so we found these two duplexes off of the mailing campaign that I thought were great properties but I couldn’t get the loans and Carrie wasn’t yet loan eligible. We needed one more year of tax returns filed before she she could do it herself. And so I didn’t want to lose the deal. And so I actually called friends and family and those who I knew maybe had good credit and capital available, told him of the opportunity, explained the numbers and asked if they’d be interested actually in financing it. And then I would pitch in 50 percent and we could own it together. I’ll help manage and kind of be the brains behind it all. And after looking at it they liked it. They bought it and we had a six and a 7 percent commission buyer’s agent commission
Rod: So no money out of pocket.
Jason: And luckily we came up with our 50 percent through the agent commission and those properties cash flow well and have several thousands of equity several hundred thousands of equity now and so it’s been great for them to have been excited on a number of ways
Rod: This is deja vu for me brother because this is exactly, I bought tens of millions of dollars with the houses in Denver this way. I put up half the money but it was through my commission it 50/50 deals, sometimes I didn’t put up any money, sometimes they put it all up in fact many times they did because they were happy just to get half the deal by putting up the money. But you know this is being creative guys. And I love that that we’re having this conversation because I don’t think it’s ever even come up on the show before and now this is how you get started and I know you’re thinking bigger things now. Correct. Jason? I mean you’re thinking larger deals now.
Jason: Yeah. We’re getting excited. We have a 10 plex I was telling you about but we also have a commercial project that’s about 1.5-1.6 million but some value add opportunity that we think with just a couple hundred thousand of capital could be worth 2.5-2.8 million based on comps. And then we also may go under contract today we’re hoping on 60 units in another market that we haven’t yet been a part of where I’m exchanging three of four plex’s here for 15 four-plex’s there and cash flow three times better, depreciation obviously and principal reduction will be significantly greater than what I’m currently doing.
Rod: So you’re going you’re gonna basically position some of these smaller properties to get into a larger deal and that’s a very common progression. Now I would tell you you know I would hold onto your properties wherever you can and just bring in outside capital to do your deals. And because frankly
Jason: We’re working on that to Rod
Rod: Alright because in my opinion that’s how you scale. That’s how you really scale to do you know to do the really larger deals and you just exponentially ramp faster. But now you’ve done really really well and I love these creative strategies. So you know let’s talk about some of the speed bumps. Let’s talk about some of the stuff you know what. Let’s talk about some of the some of the times you’ve got your nose bloodied in this in this journey of yours.
Jason: Yeah. One thing that comes to mind is how difficult it was to get loans after the 2008 2009 market crash which was a big reason why we had the crisis all to begin with and so we really had a hard time with our income level to get qualified for loans at times. And so we had to be very conscious of what we would deducted or didn’t deduct in order to keep our debt to income ratio strong enough for the banks to keep giving us loans and so I learned in time that if I sat down with my CPA did my taxes, before filing and sending them off, I would send them over to the head underwriter of the lending company that I use most often, make sure they go over it and make sure I didn’t depreciate or deduct something too much that they now kept me from being loan eligible and so they would make some adjustments or changes or recommendations send them back to my CPA who would then approve those. And then I would file and sometimes maybe I’d lose out on a thousand dollars of potential tax savings. But in essence that next year it gave me the opportunity to make tens of thousands if not hundreds of thousands on properties that I could acquire that otherwise I wouldn’t have been eligible to get a yes from the loan officer in charge of this.
Rod: That’s very interesting and it’s very prudent on your part to make sure that you weren’t being too aggressive on your on your deductions to hurt yourself in the qualification process. That’s very smart. You did all this on the side right? I mean this is pretty much you’ve still got your financial planning business, so you’ve got a day job ramp and now you’ve replaced that income. But but talk about you have you give children as well right?
Jason: Yeah we have three kids
Rod: Three kids, you’re married, you’ve got a full time job, and you did this on the side and I’m saying all this because there are people listening that are wondering how to do it on the side and I want to point out the fact that you did it on the side. So you know tough talk about you know the motivation and the strategies that you might be used to to be effective in and build this respectable portfolio on the side.
Jason: Well it started off from the beginning. We bought that first four plex and I was your nice 24. I wasn’t making a whole lot of money. The rent income from the three units that we lived in was about as much as I was making it my day job or as exchanging 40 to 50 hours a week of my time and all I had to do to collect that same income was shot up on the first of the month and receive a check from my tenants and so I fell in love with the idea of all I need to do is acquire more cash flowing properties as soon as possible and I dictate and control my time and income. Now there’s no limitation to it and so that’s where it all began where I need to figure out a way to acquire more and as many as I possibly can as soon as I possibly can. And that was the recipe I just didn’t know then as much as I know now and there’s many things you continue to learn.
Rod: You know the what. You just weren’t sure on how yet.
Jason: Absolutely yeah.
Rod: And I’d say it’s again deja vu again. I was like why aren’t more people doing this. I mean there’s cash flow there’s you know you’re able to do it. So how do you manage your own assets are you managing your these 81 units yourself?
Jason: So we started out self managing I recognized from the beginning that wasn’t going to be a good recipe. I would spend three hours tinkering around trying to fix something and only make the problem worse. And so at a very early stage I realized I need to make sure my properties profit or cash flow enough that I can hire a professional to do that that is licensed and I’ll come back and fix it. It goes wrong later and so we started out probably our first three properties. We had eight units for self managing but because I had a daytime job that was becoming too time consuming that eventually we had to hire that out. Interestingly enough though now my parents work for me full time and actually manage all my properties. So they quit their full time jobs and now work for me and it’s worked out a lot better than where it.
Rod: Do you still have the management in-house you just do it you just hired your family to do it. Interesting
Jason: Right. Yeah absolutely.
Rod: Well that works and you know once you have enough of an infrastructure to do that I mean those of you listening ideally. You’d always have this luxury but ideally you know I recommend third party management. While you’re in acquisition mode just because you just don’t have the bandwidth to deal with toilets. But you know it sounds like you’ve put together a nice little team. So you know what do you think is the most challenging part now of what you’re up to is it finding the deals?
Jason: Well yes in our particular market, South Salt Lake City, our inventory is so low, it’s hard to find anything that will even positively cash flow unless you’re willing to put 40 percent down or more. And that’s not fitting the criteria of which I want to do in order to scale. And so we’ve started to research in other markets which is kind of where I told you we’re looking at other properties in other states the cash flow better than what we do here.
Rod: What’s some of the best advice you’ve ever received about this business?
Jason: Oh man I don’t know how to identify to one. I think what I’d say though Rod is I’ve learned that you don’t have to make a lot of money to get into real estate right. To accumulate wealth, it’s not about how much you make. It’s about how much you keep. How much you keep and how hard it’s working for you. And I didn’t make a lot of money in my twenties. I really did it. I did okay as a financial adviser but we were millionaires before the age of 30 on paper because of equity we had amassed and our real estate portfolio and what I saw that growing to year over year over year was substantial that you can’t save your way to wealth like you can when you own real estate that’s leverage that we were doing. And as long as your cash flowing in your profit margin is strong enough and you and your prudent and having reserve money in case a bad economy or a bad cycle hits I think it’s a great recipe that you just can’t do in other asset classes and so I’m so excited that we started at a young age. I thought that you had to have a lot of money to put down in order to start. And we did it and we made that happen and we’ve learned how easy it is to start even when you don’t have a lot of money that you make.
Rod: Love it love it. Well I know you’re getting ready to do larger deals. You’re absolutely welcome to come to one of my 3-day boot camps where we dig deep on syndication and find and doing larger deals in fact we just put a 17 million deal under contract today. But you know let me ask you this. Knowing what you know now, is there anything you might have done differently? What would you tell your 20 year old self when you were first starting what might you do differently?
Jason: So I was highly aggressive right from the beginning and so my appetite to make it happen probably couldn’t have been much greater than it was. But knowing now how great real estate performed I think I would have been a little more courageous to try to ask for capital or borrow money sooner. I felt like I had to prove myself a lot more before people would trust me to actually partner on something.
Rod: Oh I’m so glad you said that. I want to stop you right there for a second. Guys, this is a common common mindset that people have is that you know what. I can’t go ask for money till I actually have a deal and prove that it works. You guys you do not have to do that. You can you can you first of all you can accomplish that by aligning with somebody that’s done it. That’s an easy way to do it quickly. But even then real estate’s proven. So I’m really glad you said that Jason because this is a very common misconception that people have and you know I am coaching students like you know what I’m just gonna buy a 10 unit before you know so I can show people that it works. You don’t have to do that you’ll get so much money looking for deals right now it’s crazy. I mean on the sidelines because deals are harder to find right now, we’re at the top of a market cycle. But I also want to circle back to something else you said and that is it is critical to pay attention to cash flow. You need to stress test your deals. You need to make sure that you can weather a pullback in occupancy and whether a decrease in rents and all of that.
Jason: But and maybe this is a tip to Rod for some of the listeners but what we’re trying to do to protect ourselves from that, I’m a financial planner and so that’s something I teach my clients all the time too in other areas you need to have reserves for all the properties. Typically, the more you have them the larger percentage that the banks are going to require for financing reasons even. And so in order to continue to scale, you have to have other assets. And so some of that comes to mind we’ve been funding our Roth IRAs and Roth for one case for many many years because those assets can count as reserve money.
Rod: You bet. You bet.
Jason: And I’ve already paid the taxes on them and so the accessibility to that is a lot better than if I was doing a traditional or SEP IRA or 41k. Furthermore, depreciation is one of the greatest reasons one should be investing in real estate. And I mentioned this earlier with financing. I learned that I could still great great great great tax savings year to year through depreciation but then the banks can add depreciation back because they realize
Rod: It’s qualifying yeah because it’s developer loans.
Jason: Yeah I have a stronger and stronger income every single year but my taxes have remained really low because of depreciation and so I learned I don’t need to highly deduct everything from my business that really cost something. If I can use depreciation is still get the tax savings and I also could forego the deductibility of traditional IRA and 41K contributions because my tax benefits I’m getting from the depreciation of my real estate. And so I’m funding a great vehicle also in retirement accounts through Roth accounts that grow tax free. And so in some ways you can say they work hand-in-hand. My cash flow is building on my real estate that helps fund my retirement accounts. That also creates reserve money for future deals I want to buy in real estate and if need it someday it may be the one funding my real estate deals because it’s tax free and it’s accessible. So I just love that they work hand-in-hand
Rod: And very beautiful how it all works together in it. And you did a great job in articulating it by the way. Thank you. So. Well listen my friend you’ve added a ton of value today I’m very grateful that you were on the show and I appreciate your time and I know that you’ve inspired a lot of my listeners because guys I mean here it is again, and you know you’ve seen numerous examples of huge players in the space out of thousands of units and here’s a guy that did it. One duplex for plex at a time and now you’ve got you know your ability. You quit your day job and go on and do these larger deals and you did it you know like I say when Plex on a time at your time with mostly your own money. Very inspiring brother. Thanks for being here.
Jason: Thank you Rod. Looking forward to your three day event.
Rod: Make it happen.
Jason: All right thank you so much
Rod: All right.
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