Investing is always risky, which is why you must be equipped with the right knowledge before making any investment in any financial market. In this episode, Scott Carson talks with real estate investor and TV personality Chris Naugle from Risky Builders about the current market, fixing and flipping, and raising private capital. He also shares his method to maximizing profits and avoiding mistakes as an investor. Take Chris’ advice so you can make your investments matter in this risky world.
Listen to the podcast here:
Risky Investing with Chris Naugle
I’m excited to have somebody on the show who’s going to share his wealth of knowledge not only in real estate investing, but the finance field aspect and how it’s helped him build systems and do some amazing stuff on the real estate side of the investment vehicles out there for you. Our buddy, Chris Naugle, is joining us. He’s a recognized entrepreneur, speaker, trainer and real estate investor. He has several years of high-level experience in financial services. That’s what we’ve got in common. We’re both ex-financial advisors out here. I helped him manage worth $30 million in assets under management for them. That’s a nice big number for you. You’ve maybe seen him and his wife, Lorissa, renovation designs on HGTV Risky Builders, House Hunters, My Lottery Dream Home. We’re excited to have him on to talk about his passion of real estate investing. Chris, how is it going?
I’m doing great. How about you?
I can’t complain. I’m trying to stay out of trouble. You’re also the host of the Real Estate Money School podcast. We’ve got some fellow podcasters, ex-financial advisors. We’re kindred souls from another round. Why don’t you reintroduce yourself? Can you talk about your journey to where you’re at now and your background?
The journey, I love talking about this. I’ve got to take it back to the ripe old age of sixteen years old. I grew up in a lower-middle-class family. We didn’t have money to do anything besides keeping a roof over the head. Mom and dad got divorced when I was young. Dad was an alcoholic. My mom had to raise me. That’s not the norm for everybody, but that’s how I grew up. I grew up not knowing anything about what it was like to have money. At sixteen, I got a big boy job. I was working for this restaurant. I was degraded so badly at this restaurant that every day I’d come home, I felt like I was worthless. My mom saw this, but she didn’t know what to do about it. I was probably depressed, but it didn’t matter.
The key thing that happened is one day I got pushed to that limit and I came in and I did the most important thing in my life, and I decided to quit. I quit trading hours for dollars at that moment. I rushed home, told my mom thinking she was going to be mad and I said, “Mom, I’m going to open a clothing line in the basement called Phat Clothing Company,” because that was what was cool back then. That’s exactly what I did. I took a $500 loan out from my local credit union and off I was making t-shirts in high school, selling them out of my backpack. That evolved.
At seventeen, I was selling them all across the States. I was trying to become a pro snowboarder at that time. I was doing a lot of traveling. Every time I’d travel, I’d see these awesome shop owners, these guys that I looked up to that I sold my clothes to and they had these awesome shops. I’m like, “I got to have one of those. I have to have my own store.” At seventeen, I came up with a big dream of, “I want my own store, Phatman.” Phat clothing and I was the man, you get the rest. All I needed was $70,000. This is my first dive into money. I thought, “No big deal. I’ll go around and I’ll ask everybody in my family and everybody that has money to lend me $70,000.” Bear in mind, I’m seventeen. I went around and you know what happened. I heard, “No. No way. Hell no. Absolutely not,” on and on. I almost gave up. I finally got a yes, but I got a yes from that one person. Every no puts you one step closer to a yes. I got a yes, but the yes came from somebody that I call now the unconditional one and it was my mom, but my mom had no money. She had no money. She could barely make ends meet.
In the divorce, she got the house and that house had exactly $75,000 in equity in it. My mom went out on the line and she put that house up for collateral so that her punk, seventeen-year-old snowboard kid could chase his dream and open Phatman Boardshop. I look back at that moment, “That was a foolish thing for a mom to do. That was a silly thing of her to do because what if I didn’t make it? What if I failed? What were the consequences of that action?” To my mom, those consequences were much bigger than losing the house. Those consequences were her son not being able to live his dream because she was never able to chase hers. A lot happened in between there but I’m going to fast forward quite a bit. That store went good. A few years later, I paid that loan off, I threw a big party and a lot happened there. It kept going on and on and I kept expanding those stores. I went on to be a pro snowboarder.
In the early 2000s when the planes hit the tower, I witnessed my first recession and I was highly leveraged. At this point, I was opening stores, living the life traveling, snowboarding. Life was good. I was in a lifestyle business. My business halted. One of my stores we had opened, they decided to rip the front street up and that store was pretty much defunct. I had to decide what am I going to do? Am I going to close? Am I going to go out and do something different just to get through this period of time? That transition, we talk about transition funding a lot. I needed that transition. I was either going to deliver pizzas. This is real. I was literally considering delivering pizzas at night or I was going to get a job, which I didn’t want. I put my resume out and I landed in the strangest place, the financial world. I guess they like those entrepreneur types.
The funniest thing happened. That was supposed to be a temporary thing. I ended up falling in love with it. I truly fell in love with it and I dove in, studied, got all my certifications, all my licenses. After a little bit of time, I was crushing it in the business. That takes me to 2008. In 2008, I was like a rockstar in the financial world. I was one of the top guys in the firm I was with. I was knocking it out of the park, high six digits. As an advisor and if you’re not an advisor, you probably wouldn’t understand this, but we get a little bit of an ego. Everybody’s propping you up and you’re doing all this big stuff, making all this money, you start to think it can’t end. In 2008, I flipped a couple of houses. I was doing it. I was a pro snowboarder at that time. At that point in time, I had my next big idea. My idea was I was going to buy this big dilapidated building, the ones that you see when you drive down the road and you look at them and you’re like, “They’ve got to tear that building down.” That was what I bought.
I borrowed money from the wrong person, somebody I shouldn’t have ever taken money from. I did because I was like, “I got this.” I did this in 2008, the start of the financial crash. My life fell apart very quickly. I literally got hit by a Mack truck at full steam ahead. It got so bad that I got to be one payment away from being completely bankrupt. I knew that the guy I borrowed the money from, if I didn’t continue to pay him, I wasn’t just going to lose the building. I’d probably lose a couple of fingers at best. Now you can understand the kind of guy I took money from. At that point, I was a self-made guy. I had a bit of a chip on my shoulder. I’ll never forget that night. I came home one night, I was down in the dumps. My beautiful girlfriend had just moved into my house. I remember coming home and I had to look her in the eye and I had to say, “Sweetie, I need your help. I need your help paying the mortgage. I need your help paying the utilities. You’re not going to like this. We have to rent that bedroom out because I can’t make it.”
I’m surprised that she didn’t take off because a lot of women would’ve gone running, but she didn’t. She stuck it out and she ended up marrying me. We made it through that period of time barely. I remember after that, it wasn’t easy. Kicking and screaming, but I wasn’t willing to quit. I was a determined kid and people said, “You’re determined.” Other people said, “You’re freaking crazy.” That moment, I loved Warren Buffett. He was my idol. He always said, “Buy low.” I watched real estate values plummet and I was an adviser. I’m like, “This is it.” I started buying real estate from 2009 to 2014. I dove in and I got up to 36 units. You would think that’s that recovery, shiny story after all.
At that moment, I also realized I was in trouble again. In 2014, I was living paycheck to paycheck all over again. At that point in time, I was over-leveraged. I was under-knowledge. The thing that I started to realize is I kept using the same knowledge I’d been taught in the financial world and everything else. I kept doing that over and over and it kept landing me the same place, which was money, then broke, then I get money again and then I’m broke again. That’s where I was and I’ll never forget it. At that time, something crazy happened. I was ready to throw the towel in because we had to sell off in ‘14. We had to sell all 36 units and my wife and I had got worked up and bought our dream house. That’s a big accomplishment for any young couple to buy their dream house.
Right after we bought it, it was a year-and-a-half, we had to sell it because I couldn’t do it. I couldn’t make it. I got a postcard in the mail and I was so down on my luck. I was hammered. I didn’t care. Whatever came, I was looking for that opportunity. It was an opportunity to go to a three-day seminar to learn how to flip houses. I know anyone reading this, you’re probably thinking, “Don’t you ever learn?” Maybe I don’t but the truth is I didn’t go to that seminar because I wanted to learn. I went to that seminar because they were giving away a free iPod Shuffle. That’s why I went and I had nothing to lose. I had an iPod Shuffle to gain. By day two of that seminar, I learned not a whole bunch of stuff, but I learned one thing and that one thing changed everything for me.
Here’s what it was. I learned what the successful real estate investors were doing, what the wealthy were doing and what the elite were doing was the complete freaking opposite of what I was doing. I also learned that everything I had learned in the financial world, being an advisor, they never taught me how this worked. They never taught me how it worked, how money worked in real estate. They never even taught me how money worked. At that point, I dove in. I spent a lot of money, the money I didn’t have, getting coached, getting mentored, literally kicking and clawing my way into every mastermind, every group I could where the people that I wanted to be like where. They took note of that and I started giving time to them to make sure that whatever they needed, I was there to provide it so that they would give me something. Givers gain, we all know that. If you give, you get and I knew that. I didn’t have money, that’s what I had is time.
The long story is I dove in, I started learning and that’s when it all changed. My life literally became a rocket ship of success because I started learning how money worked and I started seeking knowledge. I started seeking the millionaire mystery is what you would call it. That knowledge of what the millionaires knew that I didn’t and that’s how I got to where I am. Now, life’s a lot different. We do a lot of real estates. I travel the world, but I mean US and Canada. I travel around every week speaking on how money works in an effort to change people’s trajectory and people’s path because I don’t want them to follow that same rollercoaster I did.
There are a lot of people that get into real estate investing because they’ve watched TV, they’ve watched film. That’s why we got started back in 2002 with Flip This House. They need to flip this house and everything. Rosie, ex-wife wants to pick up paint and carpet and design that. I grew up in a hardware store so I can fix everything basically. A lot of people get in. What would you say is the biggest mistake looking back? I know you said borrowing money from the wrong guy or leveraging your investments wrong. Were you going out and taking on tradition loans?
My biggest mistake I made 2009 to 2014, I used conventional banks and I used them the way that we always use conventional banks. I was taking personal loans out 80% then I was coming up with the 20% plus closing, plus rehab out of pocket. What I didn’t realize was I thought that gravy train would never end, but eventually I hit the financial wall. That was the end of ‘13, early ‘14 and I hit the wall twofold. Number one, I had no more money to keep funding the 20% of the rehab. I wasn’t getting the renovations done as fast as I had hoped so that the rent roll would support it. I was strapped for cash. The most important thing that I learned at this point is I learned at a certain point in time the banks said, “No more. You can’t borrow any more money. Your debt to income ratio doesn’t work. I’m sorry we can’t give you any more money. That line of credit we gave you, you can’t use it anymore.” I’m like, “What am I going to do? I can’t work any harder. I can’t work any longer. There’s nothing more I can do to make more money.” What do you do? You fold them. I fell. The only good thing that comes out of that is when I did sell, at least the market had rebounded. I was able to make a little bit of money on that. Not a lot, but a little bit so it wasn’t for nothing.
I see that happen all the time. They don’t understand buying retail with 20% down at full price. There are a lot of people making real money on that as a realtor for the commissions. Let’s talk about it. One of the biggest things, and I say this all the time, is that banks and financial institutions are great at brainwashing people into believing specific things about money, interest rates and savings. When you get into the real world, what we’re in now, buying and selling, whether it’s debt or fix and flipping homes, it’s a whole different ballgame as far as money. It’s 1% to 4% isn’t saved. We look at 1% to 4% returns as being risky and as time and money of long-term. We’re looking to make at least 12% or more. It doesn’t mean it’s risky. It means you’re buying things right and leveraging things. What’re some of the biggest eye-opening things that you’ve seen? The financial advisory, don’t get me wrong, if you’re managing $30 million assets, you’re doing something right.
I was good at what I did. I was good with market patterns.
Let’s talk about that. Where do you see the market going? What are you doing to hedge your bets or leverage yourself properly this time?
I’m going to try not to go down a rabbit hole. This is my absolute favorite topic, but basically it’s quite simple. I love Warren Buffett. He says, “To be successful in the markets,” and I don’t care whether you’re talking about stocks or real estate, realize it doesn’t matter what you’re talking about, “You have to do three things only. Number one, you have to buy low.” We all understand that, “Chris, that’s not smart but I got it.” “Number two, you have to sell high. Number three, you have to not lose money.” Everybody’s like, “I don’t understand that. That’s like Bed Bath & Beyond, but I don’t get the Beyond part.” The whole concept here and it’s freaking simple, but we want to make everything complicated because we’ve been taught that money is complicated. To not lose money in real estate or stocks, all you have to do is follow one and two. You have to buy low and you have to sell high.
Back to the markets where we are at. Where are we at? That’s an interesting question. We all remember in 2008. It was like yesterday for some and for some people they’ve altogether forgotten about it. 2008 should’ve taught everybody a lot and it should have taught everybody that there’s a cyclical, repeatable, predictable pattern just like the weather. You can predict the seasons. You can predict weather storms and so can weathermen. Everybody knows how the market works, but everybody ignores it because they feed us the information to keep us buying in. Here’s the thing. 2008 was over ten years ago. Markets work in a seven to ten-year cycle, always have and always will. You go back to the Great Depression and you tell me one cycle that didn’t fit that bill and you can find all little cycles that you’d be like, “Hold on, that one was fourteen years.” No, it wasn’t. Look at the cycles. You have to understand what the patterns are.
If that’s a cycle, wouldn’t that certify and basically tell us all that we are at the top of the market? Maybe not the very top, but I don’t know where the very top is and I’ll never know where the very bottom is and nor will you nor will the smartest financial gurus in the world. It’s impossible to predict. If we can establish and admit that we’re at a high point, wouldn’t it make sense to sell? It would, but how many people do you know that are selling? How many people are selling their Apple stock, their Amazon stock, their Google? Those are never going to go down. Apple changed the world. Indeed, Steve Jobs did. Amazon is taking over the world. Indeed, it probably will. It has nothing to do with what happens when the market goes down because all stocks will follow the exact same pattern. Real estate, however, is a lagging indicator. That’s why we’re in the real estate business because it’s a lagging indicator. Secondly, it’s a tangible asset and one that will never go to zero.
If we’re at the top of the market, the smartest thing people can do is get out of the stock market. If you’ve got a 401(k), I don’t mean take all your money out and pay taxes. I simply mean inside the 401(k), shift your money into the safest thing you can go into, cash management, the fixed account. If it makes nothing, let’s assume your cash management account pays you zero interest. Isn’t zero better than losing 5%? Isn’t it better than losing 10%, 20% or 40%? The last time I checked, it is. The most fun thing about sitting in cash at the top is it’s like climbing Mount Everest. You get to the top and do you know what everybody wants to do at the top? They want to stay at the top. They want to look around and be like, “This is absolutely spectacular. This is beautiful,” because do you know what’s nice about being on the top? You can look down and say, “I’m going to go there. Maybe I’m going to go over there.” That’s called an opportunity. That’s what we all have right in front of us if you get ready for it. Not to go any further than that, that’s what I think about the market patterns. I don’t just think it, I firmly and 100% believe it. There’s not a soul that I would talk to that would ever talk me out of that. I don’t care how smart they are.
I couldn’t agree more with it. We’re at the top. We’ve recovered greatly. The market trends, things go up and down. There’s a variety of things that are feeding into stuff that we’re going to see a little bit. I don’t think it will be as extreme as it was.
Absolutely not. It will not be 2008 over again.
We’re going to see other things hit. We’re going to see dramatic changes in the credit card debt and student loan debt. You have to look at the default rates on auto debt. Those are all things that lead to people being able to pay their bills or not paying their bills. Back to 2008, 2009 before that as a mortgage banker, mortgage broker before that, you could fog a mirror and get a loan. People are thinking about equity, buying toys, trucks, boats, RVs, whatever. We’re seeing a lot of that now. People are like, “My house is increased. We’ve got twelve mortgage companies here in my office that are growing crazy in refinances. Subprime is back in the non-prime stage these days.” People are cashing out. People are overpaying for assets because they want to get into the game. That’s always a sign.
There’s another Warren Buffett thing, “When others are greedy, be fearful. When others are fearful, be greedy.” What is Warren Buffett buying now? That should tell you something right there.
The fact he donated $1 billion in stock to one of his foundations, I wonder why? Because he’s wanted to donate that there, get it off his books so he’s not taking the hits and stuff like that.
He has some other reasons he donates things too, and there’s maybe a tax deduction.
It’s a little bit of a tax deduction, especially when you donated to your wife’s foundation. It’s like Zuckerberg donating billions to his wife’s foundation.
You should study foundations and understand how they work and understand why people donate billions or their entire life savings to a foundation. Once you peel that onion one time, you peel it two times you’re like, “I’m doing that.”
The lights will go on. Let’s talk about it. What are the opportunities for somebody that’s either getting into the game or looking to do some things? It’s like, “Should I just sit around and wait?”
The opportunities are huge and I always paint the picture as there’s always going to be more opportunity in a downward cycle than there ever is in an upward cycle. It’s like here in Buffalo, we get a lot of snow. When we get a snow storm, the guys that have the snow plows and the guys that have the salting trucks, those guys salivate because they know they’re going to make a bloody fortune pulling people out of ditches, plowing driveways, doing what they’re trained to do. That’s all they do. They wait for that opportunity, but they have to wait for the storm. There are a lot of people, and this could the person reading this, you could benefit from this. One of the biggest opportunities of maybe your lifetime is right around the corner. All you have to do to figure out that opportunity is to be ready for it. To be ready for it, all you need to do is get your bank ready.
In ‘08 to ‘11, if you had money available to you and you knew where all the money was for all those deals that were about to happen, that were about to be bargain hunting deals. If you knew how to get all the money for those, what do you think your opportunity would be? Could you become a millionaire? Could you become a multimillionaire inside of a few years? You could. I know a lot of individuals that in 2009 were ready and they got beat up. They got hammered. They got people telling them they’re fools for what they were doing right before that storm. They became millionaires time over time because all they did is they sat there and they waited on the sidelines. They knew how money worked and they had a bunch of money ready. The other thing too, I know a bunch of you are thinking, “Chris, this sounds great, but I don’t have any money.” Nor do banks. Banks use everybody else’s money. That’s all you need to do is you need to mimic what a bank does. It’s that simple. If you know where all the money is and you know what banks do and how they do it in the simplest things, then you can get your bank ready too.
That’s what I’m doing. I’ve sold a bunch of my rental portfolio. I’m not doing as many flips. I’m still doing wholesale and wholetails, but literally as fast as I can get them done, I want things as short of a period of time and I’m waiting for the big show. I’m banking. I’m putting it all in the bank and it’s doing nothing. It’s making 4% but that’ll take longer to explain how I’m getting us guaranteed 4% on my money. It’s sitting there waiting so that when this happens, I’m literally going to sit there from the top of the mountain salivating going, “What do I want?” All I need to do is wait for the signs and the signs sound like people screaming.
When everybody is doing that, they’re losing a bunch of money in their 401(k)s and their stocks and things are going terrible and people are losing their jobs. In this one, you start looking for people’s cars getting repoed and student loans defaulting. Those are your signs. That’s like the bell ringing again. When the bell rings, you start buying. It’s like a boxing match. You go out and you fight. That’s when you go out there and you start fighting. Your opponent is exhausted already. Your fight is super easy too. Left, left, right hook and you got it. That’s what you do. You’ve got to get it ready. It starts and it ends with money.
If you can understand how money works and it’s not complicated. You don’t need a degree in finance as we have. You don’t need to be a financial advisor. You need to understand how the wealthy and how banks operate and what they do. The second thing you need to understand is where all that money is. You need to know how to get it. Let me tell you how not to get it. Go out and do what I did when I was seventeen. Go out and start asking people for money and watch how fast you don’t raise money. Start solving people’s problems. That’s how you get money. It’s easy because everybody has one thing that they want. Everybody has the same common problem. They all want to make more money.
If you have the golden ticket and the opportunity, real estate, the opportunity to show them how to make more money, then you hold the golden ticket to getting more money. All you need to do is solve other people’s problems. It’s not as difficult as a lot of people want to make it. If someone has a 401(k), show them how to make a better return secured. I tell people, “How about I could show you how to double your return in your 401(k) with a secured investment? What if I could show you that?” What I do is I don’t ask for money. I talk about my opportunity. I say, “Here’s this deal. Check this thing out. It’s amazing. I’ve got this great flip. I bought it for a song. These people, they had to sell it. I stole this house. Look at these numbers, Mr. Neighbor.” You have a pop with your neighbor, “Look at these numbers. I’m going to make $50,000 on this flip. This is insane. I can’t believe I wasn’t doing this years and years ago because this would have changed my life.”
Your neighbor’s sitting there going like, “How do I get involved in this?” You say, “I don’t know. Do you want to do this deal with me?” They’re like, “Yeah. What does that mean?” I’m like, “I don’t know. I’ve got to find the money for this deal. Come in and how about you be the bank on this deal? You fund this deal.” They’re like, “I don’t have any money.” I’m like, “We just got to talking. You have a 401(k) and you’re talking about how terrible your returns have been. It’s right there.” They’re like, “I can’t take that money. I’ll pay taxes and penalties.” I’m like, “You can. Go to your HR and ask if you’re allowed to take a loan. I bet you any money you can take a loan.” They’re like, “Don’t they charge me interest on that?” I’m like, “They’re going to charge you interest, but guess who gets that interest? You do, man. You’re just going to pay yourself back with interest and that’s the best thing ever. You’re going to pay yourself back with interest. I got one better. What if I pay your interest and I double your interest? Let’s say your loan is 5%. What if I give you 10%? What if I double what you got to pay? Even though you’re keeping your 5%, I’m going to give you another 10% and I’m going to give you the first position lien on this.”
They’re like, “I don’t know what that means.” I’m like, “That means if I don’t do what I said I’m going to do here and I don’t pay you, you can have this amazing deal and the $50,000 yours. We’ll get the attorney to draft all this up. I’m not an attorney, I don’t know how to do this, but your attorney can review the docs with my attorney and let’s do this. Come on.” That is how it’s done. I don’t care if it’s a 401(k), an IRA. I don’t care if it’s a home equity line of credit. I don’t care if it’s a savings account. You duplicate what I said. How hard was that?
It’s not hard. One of the most powerful things that I love that you said there is you’re talking about the deal. You’re talking about the case study. That’s one of the biggest things is investors don’t like to talk theory. They want to see something tangible. You have a great little pitch there, a great little aspect of it.
It’s how it happens. I’m not kidding. I’ve done that so many freaking times over beers or over a glass of wine. I can’t even begin to tell you how well that works.
It works phenomenally. We talk about doing something like that in the note space like, “We’re buying distressed debt. Here’s the deal that we’re looking at. Here’s the deal that we closed on and some different case studies.” The idea here is you’re just talking. When you start talking about returns and I’ve seen it and you don’t do this, which is a beautiful thing. I’ve seen a lot of financial advisors go in and sit down with clients talking about PE ratios.
I come from that world. My eyes just roll back in my head and I’m like, “Here we go. I’m not talking about this.”
They’re trying to sound like they’re smart and it takes people away. In layman’s term, just have a conversation. I’m originally from Minnesota, so we say pop up there as well. Down here we say, “We’re going to have a Coke or glass of tea in the south part here.” It’s having a conversation. It’s sharing the word, sharing what you’re focused on. What are a couple of things that they should not be doing while raising capital?
If you’re raising capital, there are a lot of things you shouldn’t do, but let’s hit on some of the biggest ones that I see a lot of people doing. People are going out there and guaranteeing a return. Don’t you ever guarantee a return because you could go to a lot of places, but jail is one of them? Don’t guarantee returns. You can’t guarantee a return. It’s impossible. You don’t do it. Secondly, never ever borrow money in your personal name. You violate the Dodd-Frank rules and it’s what got many people in trouble. If you’re going to go out and you’re going to talk to your neighbor and your neighbor’s going to do the deal with you and lend money to you, they’re lending money to your entity, to your LLC, your S corp, your C corp.
The other thing right along with that is don’t ever even touch the money. The money goes from your neighbor or your neighbor’s 401(k), your neighbor’s IRA direct to the title company and gets held in escrow until that deal closes. If you’re in a title state like we are, direct to the attorney’s escrow account and it sits there until the deal closes and when the deal closes, the title company or the attorney are instructed to file the paperwork. What paperwork? The promissory note and the mortgage. Make sure that the neighbor is in a secured position. Once the deal’s closed, you or your entity owns that house. At that time, the title company or the attorney can send the money back to you.
This is personal preference, but this will keep you out of hot water. This isn’t a no-no, but this is a smart yes and you should do this. When that money comes from the attorney, open up a segregated bank account for that particular deal so that everything you do with that deal is in one bank account. When you have to answer hard questions, when things don’t go the way that they’re supposed to, and if you think I’m kidding about them not going the way they’re supposed to, trust me it will happen. Give it time. The money’s in a segregated account when you need to show him that all the money was spent in the deal, not on the new car you’re driving, not on the fancy suit, not on the trip to Las Vegas. It’s documented and you’ve got a clean bill of health right there. Be transparent. That’s it. There are a lot of other things I can tell you to do, but those are some of the most important ones.
That’s a good one, making sure that attorneys are handling all the paperwork or title companies handle it, having it wired into neutral accounts, and making sure to track all your expenses and things along the way.
Make sure that when you get the insurance on the property that it lists your neighbor as additionally insured, in case for some reason the house burns down or a tornado takes it away. That insurance company writes a check to your neighbor directly so that you don’t just get one check and go, “I’m going to Cabo.” The insurance policy is important to protect not only you but also the investor.
Did you mean investor, not neighbor?
Neighbor, investor, same difference.
I’m making sure because of John Smith next door, your neighbor that you borrowed the money from.
The reason I do that with your neighbor is that I want everybody to understand that the money that you need and the people that have the money for your deals, they’re not the guys driving it. They’re usually not the guy who’s driving the Porsches, the Ferraris, live in the big fancy houses. They’re the people living next to you, the people closest to you. It’s called your primary circle, friends, family, coworkers. Those are the people that have your money to fund your deals in the beginning.
Those guys that are driving Lamborghinis don’t own them. They’re leasing them for the most part, renting, borrowing, usually the same with the girlfriends that go along with those. The thing that’s funny that I love that you shared out there, it’s a simple plan. Real estate investing is a simple business, whether you’re wholesaling or wholetailing, fix and flipping. If you keep it simple, you get to be too crazy out there and make things complicated. It not only complicates your business, but it also complicates the private capital raising. A couple of things, there are 24 million households that have a net worth of $100,000 or less in IRAs basically. They’re the largest untapped market out there. They’re the next-door neighbors, the truck drivers, the people that you come in contact every day. The people that have millions and millions of dollars, they’ve got their advisors. They’ve got their accountants or their gatekeepers that manage it. What are some of the best ways that you would encourage them to start that conversation? Besides sitting down with somebody, how do you get to that conversation? You don’t just start running up to your neighbors and say, “I’ve got a deal I’m working on.” Let’s talk about some of the most effective and simple ways for people to start with conversations.
Starting a money conversation and I call it the big lie, but we’re not going to get into that now. That’s what I call it and I do a whole series on the big lie, but we’re taught not to talk about money. We’re taught not to talk about money to your friends, your family. It’s like we were brought up, “Don’t talk about money,” but my thing is talk about money but do it the right way. Here’s how I do it. I talk about my money, my IRA, my 401(k) and I talk about the things I’m unhappy about. I talk about the things I don’t like. Sorry if there are advisors on here, but I have earned several years’ worth of hell to earn the right to do this. I’m going to take it. “My advisor called me and he’s trying to sell me this new thing. I don’t know, it doesn’t sound right. I heard this other guy talking about the market being at a high point. He wants me to buy this thing and I’m thinking, ‘He’s doing it to make a commission.’ What do you think? Have you got an advisor that’s doing that stuff?”
The person you’re talking to is going to talk about a war story or something that they’re not happy with. “My advisor doesn’t even call me. You should be lucky your advisor even calls you. My account’s been going on down the last two quarters and he hasn’t even called me once. Doesn’t that suck? We’re paying them so much money. They’re supposed to be watching our money all the time because I’m busy working. I’m driving a truck and do whatever I’m doing. They should be watching the money.” Right there, that little frame-up, that’s how you begin a conversation. Talk about your pain and they’ll talk about theirs because everybody likes to talk about their problems. When they talk about their problems you say, “I went to this thing and I heard about this thing. I listened to this podcast. They were talking about this thing called self-directed IRAs.” I googled this guy, Mitt Romney. When he went into the office, he had this thing called a self-directed IRA and he made way too much money and everybody was saying he’s doing something illegal because he could never have made that much money in the market. It’s impossible.
The best gurus came out and said there’s no way he could have made that much money over that timeframe. Mitt Romney’s like, “You guys are such idiots. It’s simple.” He had a self-directed IRA and all he did is he invested in companies that skyrocketed and when those companies skyrocketed, they bought him out because they didn’t want him in there. They bought him out and his IRA made a ton of money. The other thing too that I do, and this is a fun way and then a lot of people, the information they get is wrong and they’ll ask their advisor, “Have you ever heard of self-directed IRAs?” Their advisors are going to answer a couple of different ways but usually it’s one of two ways, “We have those.” “How would I go about getting in one?” “It’s easy. We fill some paperwork out and we’ll move into the self-directed platform. At the platform, you can direct the stocks anyway and I’ll still make recommendations to you. The one I did last time, do you remember that one time I called you and I made that recommendation?”
If you’re an advisor, I’m sorry but this was me. I didn’t call my clients enough. I’m almost speaking of me. The self-directed platform is not a self-directed IRA. You say, “That’s not what I heard. Here’s how the guys said it about the self-directed IRA. He told me to ask you if I want to buy a dairy cow with my IRA money, can I buy the cow?” Your advisor says, “Are you kidding me?” “Literally, I want to buy a cow. Every morning, I’m going to go milk the cow and I’m going to put the milk in a bucket and I’m going to sell it out front. Whatever I make on that milk, I’m going to send it back to the self-directed IRA and that’s going to be my earnings because I think I’d make more money doing that than investing in the stocks that you’ve been putting me in.” If he laughs, then he doesn’t have a self-directed IRA. The reason an advisor typically will not tell you about self-directed IRAs or suggests self-directed IRAs is so simple and it’s the big lie. It is that they can’t get paid.
I was guilty. I knew what self-directed IRAs were and did you know how many times I recommended to my clients to do a self-directed IRA? It was zero times. Isn’t that a shame that all the best secrets and the best answers that the millionaires use, that they’re using day in and day out, people like Mitt Romney, are all available to every single one of us yet none of us know about them because the people we get advice from are not talking about it because of one reason? They haven’t figured out how to get paid for it. Not even them but their brokers and the institutions can’t get paid for them. There it is. That’s the reality. Everything we’ve been taught about money our entire life, what if I told you that everything you’ve been taught about money and how it works and exactly how it is, what if I told you there’s a whole another side that you’ve never been told? What if I tell you that is the big lie and there’s this whole other way over here that the millionaires use. What if I told you that the millionaires and banks don’t invest money the same way you do? You’d probably ask why they don’t. Could it be that they know something you don’t know? Is it just that they’re stupid?
Maybe banks are stupid but the last time I checked, they know something that we don’t know and that’s it. You have to seek out knowledge. If you want to learn how to change your life, you have to seek out financial knowledge because no one’s going to bring it to you. No one’s going to serve it to you on a platter. It’s up to you to seek out that knowledge. All of you in the audience, you are what I call my five-percenters. Do you know what that means? It’s Social Security numbers. 5% of the population will be financially secure at the age of retirement. The other 95%, they will not be ready for retirement. They’re going to be working at 65, 75 and 85 not because they want to, but because they have to. All of you in our audience it’s because you’re seeking something. You’re seeking knowledge and you are part of the 5%. If you take action on that seeking and you do something about it, you will find out that there is a big lie you’ve been taught your whole life about money. I try not to go too deep because I can make a lot of enemies and if I go into what I know, I could probably end up face-down floating in some river. We’re not going to go there.
That’s why banks are the biggest buildings out there. It makes sense to be the bank because they’re arbitrage and glad to pay you 0.1% or 0.01% on your money and lend it out at 12%, 15%, 18%, 24% credit cards and arbitrage the difference in there. That’s the thing people don’t realize. If you’re reading this, really understand what Chris is talking about here. He’s 100% correct. Things are not set up for the little man. They’re set up for the big guy, but you do have to be an opportunity to be a big guy by using same tools, using a truly self-directed IRA to use your money, borrowing from your 401(k) to go out and invest in something.
We had Keaton Munster from Quest Trust Company on to talk about some of the ten principles of seeking good advice, but also not just trusting your financial advisor from a firm. We’re not going to make Chris name any names of where he worked at and stuff like that. That’s the thing. One of the most powerful nuggets that I was given was the Rule 72, compound interest, how is your money going to compound? How is it going to double for you and how do you leverage that to get where you want to be? I want to bring us back from the financial side a little bit more and some nuggets out there. You’re doing a lot of wholesaling. Are you just wholesaling there in the Buffalo, New York area? Are you doing other parts of the country? What’s been your real estate focus and dive into that?
My real estate focus has changed drastically over the last few years. We’re huge flippers, flipped hundreds of houses and that’s what we did for the show. We’re barely flipping houses because the margins are squeezed and I set rules. My rule is 20% profit or I don’t do it. Most of what we’re doing now is wholesale and wholetail. The reason for it is it’s nimble, it’s easy, and I can work on small margins. The only thing I have to do is I have to get good at marketing. I’m doing a ton of wholesale. Even the wholesales are getting tough because remember the market is at a high point. Investors are getting skittish. Flippers are starting to realize what I know and they’re like, “It doesn’t make sense.” If it doesn’t make sense for a flipper and you’re only a wholesaler doing assignments, you’re going to find yourself pinched pretty quick where you’re going to be holding properties. You have to get good at money. Once you get good at money and you’ve got a lot of neighbors or a lot of coworkers that love what you’re doing, you all of a sudden have money to take these deals down. You already know it’s a good deal because you bought it right. Once you bought it right, you take the deal down.
Here’s where the biggest opportunity I see in the real estate market is, it’s wholesaling. Mimic what the banks do. What are the banks doing? They’re taking all those bank foreclosures. They’re not selling them to you and me anymore. They’re taking them. They’re doing super late cleanouts. They’re cleaning all the crap out. They’re making the house literally so you can walk through it and it doesn’t smell like something died in there and they’re putting it back on the MLS. I’m guilty of this, but it’s hard even to say it because the TV shows are out there talking to the masses saying, “Look at this amazing opportunity to flip houses. In 22 or 23 minutes 3 if you’ve got the right network, you can buy a house, you can flip that house, do the renovations. You don’t have your wife pick the colors out. She picks the floors out and we put it on the market. The happy buyer comes in, big smile. They pay as all cash and we’re out and we made $50,000.” It doesn’t work that way, but that’s what everybody thinks that it does.
The people, not you, the 95-percenters, they want what we have. Why don’t you give it to them instead of the bank? Why don’t you go out, make your marketing efforts, get your deals at the right formula, which is I do ARV times 70% minus rehab? That might not work in your market, but that’s mine. We get them, we take them down, we literally do a light cleanup, maybe landscape it. We put it back on the market as a fixer-upper. Why fixer-upper? This TV show called that, that’s pretty popular. We call it a fixer-upper. I’m not that smart. I’m just good at mimicking what works. I put it back on the market and they all sell over ask. Sometimes I’m embarrassed because I’m used to selling beautiful houses, show houses, HGTV houses. Now I’m putting these on the market and I’m like, “That’s not my house,” but it is my house. It’s just I don’t want to admit it because it doesn’t look like that.
That right there, what I’ve done is now I’ve got a product that appeals to investors like you and I and also mom and dad that wants to come in. Husband’s going to do the work after work and put the new kitchen in the bath. That’s the American dream and they’re buying the house, but they’re not building in a profit margin. Their profit margin is it’s their dream house that they’re going to create, just like Chip and Joanna did. Do you get the drift? It’s like you opened up yourself to the entire market and you opened yourself up to massive profits. That’s what I see the biggest thing and if that fails, we always go strategy one, two and three. Strategy one if I can assign it, I take it down. I list it on the MLS. If that doesn’t work, I fix it up myself. I put a renter in there. I take it to the bank. The bank gives me 80% of the appraised value. I pay my investors back because I bought it right and I’ve got a 100% turnkey rental paying me every single month. If I did it right, I have zero money out of pocket.
It’s called the BRRRR and it’s pretty cool there in Buffalo, so that works well. That’s what I do. That’s what we’re doing in real estate and I’ll go one step further of what we were doing. We’re in Buffalo. I don’t know if you call this a B or a C market now. I would say it’s more C, but it’s trying to be a B. We take these portfolios. Once I get a couple of those BRRRRs, I package them together. I show the return which was in the teens for our cap rates. I package them up, put a pretty bow tie on them. I ship that opportunity out to California to New York City and now up to Toronto and I sell these properties at full market value because they’re not buying it for the equity. They’re buying it for the passive income and I sell turnkey rentals and nice ones for that.
That’s the thing I want people to realize something you’re doing, you’re hitting on whatever hits the fastest or whatever ends up hitting, whether it’s wholesale. Maybe you just have it under contract to doing an assignment.
Even if I make $3,000, I’m out. Quick money is the best money.
Quick money is the best money, especially when you start annualizing returns on that stuff. If you have to take it down and you take it down, light clean up if you can, maybe a little paint and carpet. There’s a stain on, as long as it’s not blood or a dead body in there, let’s clean it up so it doesn’t stink. Another thing that’s important here, a lot of people fail to realize you’re not putting it for full price on the market. As I like to say, you’re allowing people to waft, willing to smell the discount. They come in and they’re willing to come in. Also, listing at $0.80, $0.85 on the dollar gives you a lot of opportunity in a bidding war. People that bid that deal up above listing price, fewer concessions, fewer things you have to fix because they want the house. Whereas a lot of people, especially realtors, elicit at full price and they have no place but to come down and drop the price.
You nailed it, that’s what we’re doing. We’re listing way under full retail value and at an incredible discount to the average person that’s looking at it. We might only make 10% on these things and I’m okay with that, maybe 15%, 10%. That’s how we’ll discount them or how we’ll mark them up. What happens every single time is they go in a bidding war. Even in this market where the bidding wars aren’t as common, we’re still driving bidding wars because it’s cheap and they perceive that incredible value. I laugh about it, but it makes all the sense in the world. You’re feeding what people want. That Warren Buffett thing again, “When others are greedy, be fearful. When others are fearful, then you can be greedy.” Don’t mix that up.
How long do you think we have before you were going to start seeing major downturns?
I’m going to put my foot in my mouth because there are a lot of variables to this.
We will not hold you accountable to it.
You can, because I’m probably right. You’ve got six months. You’ve got a lot of political stuff going on so you’ve got maybe six to eight months. If you’re redlining it now, you’re going to wish you didn’t.
If we’re all talking about the end of the year, first of 2020, I say that we haven’t been buying as much as we have unless we have gotten a substantial discount on the debt. We’re a little better off because we’re buying stuff usually at $0.50 on the dollar or less because we’re buying the debt and then working to keep the borrowers in there. I’m avoiding flips as best as I can. Those vacant properties where it’s heavily rehabbed do not make sense.
Here’s the thing, the hardest part about what you said about avoiding them is now because the market is cooling. We’re getting those opportunities thrown at us every day. I’m like, “No.” Unless I look at it and I’m like, “Really? How?” and then I look at it. What you do with the notes is way safer than what we do. It’s a safer play and it’s basically the same thing. You’re just doing it better.
I won’t necessarily say if there are a lot of moving parts that go along with the due diligence. We don’t deal with contractors and we’re not dealing with end buyers, but we do have the borrowers on there. I had a lady who reached out to Hazel, my asset manager. We’ve offered this lady a loan mod. We’ve offered to keep her in the house in some fashion. She’s like, “I can’t pay this. I’m just going to hire an attorney.” I’m like, “Do you realize that attorney is going to want a $1,000 to $1,500 retainer to take on your case? They don’t work for free. Why don’t you do like we say and pay the $1,500 towards your mortgage?” I’m like, “Great, we’ll end up with the house.” That’s the thing too, our market has increased over time. A lot of people are higher-price stuff. You’ve got to leverage yourself. You’ve got to be flexible so that you’ve got more than one exit strategy in the deal. You’re working into three or four strategies on AHS and it flows. It depends on what goes on. That’s the smartest thing you can do as a real estate investor is not to get sidetracked with one exit strategy. The Private Money Guide, is that your book? You’ve got a book out there.
It is my book, The Private Money Guide. I wrote it on the way to Mexico. It took me seven days to write it, but I know you’re like, “It can’t be good.” I assure you, it’s good. I did nothing for seven days but write this book. Everything flowed through me. It’s The Private Money Guide: Real Estate Edition: Solutions to Finding Money. Where to Go and How to Ask. This literally is your holy grail to where all the money is for every deal, but not just where it is. It shows you how to structure your opportunity, how to put it together in a marketing campaign so that you can talk to your neighbor in a sophisticated way. It shows you how to do this the right way, not the wrong way. If you miss one step, you’re doing it the wrong way. It’s one of the greatest things I did. I didn’t do it to make money on the book. I did it because I had to because I didn’t see anything else out there that told people how to do this. It’s a step-by-step guide on how to do it.
That’s the thing is when you’ve come from the other side and you’ve seen behind the curtain, you’ve seen the dark side or the things that aren’t being truthful out there, it becomes a passion for sharing those truths or falsehoods out there.
That’s why literally every week on my own coin I am on the road traveling. I was in Tampa. I flew in. I got up at 3:00 AM. I flew to Tampa. I spoke to a real estate investor group twice, hopped on a plane at night and flew home. I didn’t ask for any money from the promoter. I went there. I did that on my own nickel. I make a lot of money on our money operations, on our funds, on our real estate. I feel like it’s my ultimate duty to go out and teach people how money works. I teach them the secrets of the wealthy because nobody else is going to. Because I’m doing that, I’m giving opportunities and the strangest areas are popping up everywhere for me. I’m making on those opportunities but everybody thinks like, “What’s in front of you is how you have to make money.”
Sometimes the money’s over here and sometimes that money is deferred down the line a little. If you focus on other people and solving people’s problems and helping them get where they want, you will in turn get what you want. It took me most of my life to figure this out. I don’t want you to think that I’ve been doing this my whole life literally. When I figured this out and I figured it out because I got desperate and because I literally just surrendered. I surrendered and then I figured it out and I watched what the wealthy were doing and that’s what they all do. They give their time, give their money, give their energy, give their knowledge, all of it, their secrets. They openly give people their secrets because they know if they do that, it will all come back to them in one way or the other. Sometimes that way it comes back is a front row parking spot at the restaurant. I want you to all to realize that sometimes that’s the get back. That’s where it begins and you should be thankful for each and every single one of those things that are gifted to you.
Chris, what’s the best way for people to reach out to you? You’ve got an amazing podcast full of information, great nuggets.
You were on it and some other unbelievable people on there. The podcast, the Real Estate Money School, talks about the journey. That’s it. It talks about the journey to success, the ups and downs and how people did it and how money played a factor. Check it out. It’s fantastic.
It’s a great podcast. If people wanted to pick up a copy of the book, is there a website or do they go to Amazon to pick it up?
It’s on Amazon so you can do that. You can go to MoneySchoolREI.com/book. You can grab it that way as well.
What’s the best way for them to reach out to you, Chris, to get more information and plug into what you’re doing?
Chris, thank you so much for dropping some amazing knowledge nuggets. Your passion flows through you. There’s nothing better than sitting, visiting and sharing secrets with people that are life-changing for everybody that comes in contact with.
I agree and I appreciate your time and you give me the opportunity to be on this show.
You brought a phat episode to the thing. Thanks so much. I appreciate you.
It was a great episode. Thank you so much. Go check out Chris’s podcast. Download the eBook on that or go to Amazon and buy a copy. That will be one book that you will not want to put down and you’ll take plenty of notes on it and it will change. If you start playing by the rules that the rich have when it comes to money, you’ll be playing at a whole different ball game than what everybody is taught in traditional education, traditional bank and stuff like that. Change your money, change your focus and you’ll change your life. Go out, take some action and we will see you at the top.
- Chris Naugle
- Real Estate Money School
- Phatman Boardshop
- Keaton Munster – previous episode
- The Private Money Guide: Real Estate Edition: Solutions to Finding Money. Where to Go and How to Ask
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- @Chris_Naugle on Instagram
About Chris Naugle
Chris is a nationally recognized entrepreneur, speaker, trainer, real estate investor. In his 16 years of high level experience in the financial services and advisory industry he managed over 30 million dollars in assets. Specializing in alternative investments, retirement strategies, and wealth accumulation. Using his expert knowledge in finance he has successfully bought, renovated, and sold hundreds of properties. With a passionate belief that success in real estate is not determined by your actual resource, it’s determined by how resourceful you can be.
Chris speaks to thousands about how money really works and how to place your money in motion. Through his success in real estate Chris and his wife Lorissa’s renovation designs have been featured on HGTV’s Risky Builders, House Hunters, and My Lottery Dream Home. Thank you both! have a great Wednesday