In this episode, Anderson Business Advisors host Clint Coons, Esq., sits down with long-time client and real estate investor Tarl Yarber to discuss whether now is the right time to invest in real estate. Tarl, a “recovering house flipper” who has completed over 650 flips, shares his journey from wholesaling in 2005 to becoming a full-time investor focused on the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat). They explore the current market disruption, why people should be buying when others are running away, the importance of understanding construction and value-add opportunities, and how to properly evaluate cap rates beyond surface numbers. As Tarl explains, “Will my future self thank me on this deal or not?” – a question every investor should ask themselves. Tarl also explains the power of 1031 exchanges for building wealth, including a detailed breakdown of reverse 1031 exchanges. The conversation covers market fundamentals, the benefits of forcing appreciation through construction, and why investing is about mitigating risk first, profit second. Tune in for expert insights on navigating today’s real estate market with confidence!
Tarl Yarber is a “Recovering House Flipper” with over 650+ single-family residential properties purchased, rehabbed, and resold over the last 13 years. Tarl is considered an expert in the single-family residential investment industry, specializing in scalable and duplicable systems for real estate investing. In the last few years, Tarl has been fighting his addiction of Fix and Flip, and focusing on a new passion, BRRRR investing. As a recovering house flipper, Tarl has leveraged his years of experience in rehabbing houses to master the buy, rehab, rent, refinance, repeat investment model. In addition to his real estate success, Tarl has teamed up with Ken McElroy to create The Limitless Financial Freedom Expo, where they focus on real, no BS education, as well as bringing some of the world’s top financial minds to one event.
Highlights/Topics:
- (00:00) – Intro
- (01:35) – Tarl Yarber Introduction
- (05:45) – Lesson Learned from Flipping
- (07:09) – Limitless Expo
- (17:32) – Is Now a Good Time to Buy Rentals?
- (19:51) – Why People Should Buy Real Estate Now
- (28:24) – Evaluate Cap Rates
- (37:27) – Reverse 1031 Exchange Explained
- (42:38) – Summary, closing comments, final words of advice
Resources:
Instagram: @tarlyarber
Limitless Expo (July 31- Aug 2 in Dallas) Site: go.LimitlessExpo.com (discount code Tarl10)
Schedule Your FREE Consultation
Tax and Asset Protection Events
Anderson Advisors Tax Planning Appointment
Full Episode Transcript:
Clint:  Hey. What’s up, everyone? In this video, what we’re going to be doing is we’re going to be talking to a real estate investor. He is also a client. I’ve known him for over 15 years, and I’ve seen what he’s been doing in the market.
What I want to tell you is this. Everyone who’s out there right now wondering about, is now the time to get into real estate, you’re sitting on the sidelines, and you’re not sure if you should take that step? My guest, Tarl Yarber of Fixated on real estate, he’s also the co-founder of the Limitless Expo with Ken McElroy, is my special guest who is going to come on today. He’s going to talk about the real estate market and whether or not you should be investing today. Tarl, thanks for joining me.
Tarl: Hey, Clint. Thanks for having me. It’s amazing how we really have known each other that long. That’s crazy.
Clint: I know it makes us feel old, right?
Tarl: A little bit. I was young when I started this business. Not anymore.
Clint: Yeah, I can see the gray in you. You didn’t have that when you were up in Seattle.
Tarl: Yeah, it’s called stress.
Clint: Awesome. Thanks for joining us. Why don’t you tell the viewers a little bit about your story about how you got started in real estate with the flipping and then moving into rental real estate? It was we were talking about before we started. I think that’s so on point. A lot of people that you know are thinking about it need to understand that to get to really value your properties, you have to understand what goes into a property. That’d be great if you could just start with that.
Tarl: Yeah, no problem. Technically, I bought a course in 2005 before the 2008 crash, and I was 20 years old at the time. I went to a Sellathon, one of those places where a whole bunch of big speakers are there, and they’re really there just to sell you stuff. I didn’t know, I was 20. I bought a course on how to wholesale real estate, assigning contracts, and that’s how it got originally started.
I did three deals in 2006, and then I stopped doing real estate all the way together just until late 2010. It’s not because the market was crashing that I got out because I hated real estate at the time. I didn’t like it, so I just bounced out after my third deal. Due to REO, market circumstances, life changes, I stumbled back into it at the end of 2010, and then I’ve been full-time in it pretty much ever since.
I specifically got into flipping. If you go back in time in 2010, 2011 with all the REOs, all the foreclosures, everything, it was very, very, very challenging to get any funding as an investor back then. The quote deals were prevalent, but the money wasn’t, even though we didn’t really know they were deals. It’s easy to look at hindsight on a market to say like, oh, there’s deals everywhere. I could tell you firsthand, we didn’t know that those were deals everywhere. Most people didn’t, and especially if you couldn’t get funding for it. That was very challenging.
We basically flipped a lot of stuff. We had access to a lot of “deals”, but the margins were thin, and we didn’t know there were deals. That was the big thing. I got suckered into, for lack of a better word, flipping because of the quick income, quick cash. Did that for years and years and years. It wasn’t until 2016 until I actually kept my first rental, which is embarrassing to say that I did almost 500 flips in that time period and had zero rentals until 2016.
It wasn’t until I kept my first rental that all of a sudden I realized how silly I’ve been when it comes to doing this real estate business. I got caught up in the income game instead of the wealth building game, taxes, and all that great stuff. It’s hard to believe that after that many properties, I didn’t really understand depreciation even. I really didn’t. I heard about it and I’m like, cool, that sounds great. Anyways, I’m going to go flip houses. I just kept doing that.
After I started keeping my first few properties, I got addicted to it. In 2018, I became a recovering house flipper where I only focused on keeping properties, pretty much utilizing the BRRRR strategy, which is the buy, rehab, rent, refinance, repeat strategy. I got lucky during the time period I was doing that to where almost every property that I did became what’s called an infinite BRRRR, which is at the end of the project, I buy a messed up house, I fix it up like a flip. But instead of selling it, I keep it and I refinance it, get a hundred percent of my money out, and it still cash flows. It’s an infinite return.
I got under the assumption that that’s normal, that that’s supposed to happen because every deal I did was that. It was great. Year 2022 rolls around, and the rates go up. All of a sudden it wasn’t doing that anymore. I took a break for about a year, 2023. I just wanted to see what was going on in the world. I took a pause. In January, 2024, I started buying again with a new fervor.
Even to this day, I’m buying as much as I can but with the thought process of keeping everything and opportunistically flipping. My entire concept today is keep the best, sell the rest, and using my active income that maybe I’m making on some of these flips and putting it back into passive assets for the long term.
To summarize it, Clint, my question I’m constantly asking myself in real estate right now is that, will my future self thank me on this deal or not? There definitely are deals where my future self would thank me if I sold it right now because the deal sucks or whatever, or it’s just is not a property we want to keep. More often than not, my future self would thank me if I kept the property, so I have to do everything I can to do that.
Lastly on my rant is that I learned from flipping that a huge chunk of this business in real estate involves operations, rehab, construction. It also happens to be one of the biggest things a lot of investors avoid, which is rehab, construction, and operations. We get focused on the deal, not everything in between on the deal, which is the actual operations, construction, and stuff of most projects. Through flipping, it made us very good at that. It just makes deals a lot easier for us because of that. Anyway, that’s my rant. That’s my story. That’s what we got.
Clint: You’ve got this event coming up, the Limitless Expo with with Ken McElroy. I’m going to be down there as well. Why don’t you tell everyone what they’re going to learn? I went to it last year and the year before, and I was just shocked at the presenters, the caliber of the people that were there, the caliber of the investors, the deal making or networking that went on. I have to say it was the best event I’ve attended from that standpoint. Obviously I’m there looking for clients totally but just the quality of the whole thing. If you could tell the listeners that are watching this right now about the event and if they wanted to attend the event, which I highly encourage everyone to do, how they could do that?
Tarl: Thanks for the plug. If you guys are interested in more details, go to go.limitlessexpo.com. All the event details are on there for sure. For those of you guys that don’t know Ken McElroy, he’s got nearly $3 billion assets under management for multifamily, he owns them all with his business partner Ross. He’s the real deal. If you watch his YouTube or watch anything else he does, what you see is what you get. That’s really who he is.
What I learned since Ken and I created the Limitless Expo in 2022, it was originally his spark of an idea. It was a perfect partnership between the two of us because he had the idea, but I knew how to turn it into a forest fire through running conventions, conferences, events, and stuff, but. For him, his main purpose, why we originally thought about, it’s like, hey, there’s so much going on right now. This is 2022 where there’s a lot of uncertainty.
This is January, 2022. He’s just like, the rates are going to go up, people are get slapped in the face, and they don’t know what’s coming. He’s selling in the multifamily world. How many people were buying when the deals didn’t really make sense to him? He was holding back.
He’s just like, people need more financial education, not just in real estate, but they need more financial education on money and what’s happening in the world, what’s happening in the US economy, and what’s happening in geopolitical stuff, everything. Where can we bring a bunch of people together that aren’t going to sell you anything, there’s no sales from the stage ever, none of that BS? We’re just operators. We’re operators out there in the trenches. How can we learn from these people ourselves?
Ken and I had the idea and we thought, well, why not once a year, we try to bring legitimate operators that are in the field, in the trenches getting after these people, don’t have social media accounts, but they own thousands of properties or they’re large business owners of some sort, not just real estate. Limitless is actually maybe only 40% real estate. The rest of it is business, finance, alternative investing strategies, scaling, exiting, buying companies, all sorts of stuff. Macro economics is a huge part of what we go through, and whatnot.
How do we bring all these people together so him and I can learn? Selfishly, Ken and I created this so that we can meet all these speakers. We want to meet these people, and attendees. What blew us away, and this is now our fourth year, more along the lines is that we’re more interested in the attendees. The speakers now are like, yeah, there’s some cool dudes, there really are like, and women that are amazing, but I’ve met way cooler attendees and stuff that are out there.
What I love about it is just our speakers aren’t allowed to just show up and leave. We don’t let them do that. If they’re not willing to be an attendee, then we don’t want them there. Robert Kiyosaki has been with us every year. He sits in the front row of these sessions, and he’s wandering around just like anybody.
One of my best compliments I’ve ever had in my life was after the very first Limitless, Robert told me and Ken, he’s like, this is my favorite conference I’ve ever been to and is the only one I want to go to. He’s been to it every single year. It’s his favorite one. I love it. He’s been to thousands of these things. There’s a huge pat on my back for sure, for that, for Ken and I.
Point being is that Ken and I are the avatar for this event. Clint, you’re the avatar for this event. We want to buy a ticket to go to this event. I’m plugging it pretty hard, but that’s legitimately it. Massive networking, we have so much content, it’s not even funny. Anything you can think of is there. It’s a buffet of info if you’re looking for something that’s going to be there.
Especially right now, there’s so much uncertainty out there and so much disruption in so many different markets. Multifamily hasn’t even started to get a blood bath yet. It only just now is going, and it’s not even going yet. The lawsuits haven’t started yet. That’s another whole conversation. Those are coming.
There’s so much disruption. You can’t go on social media or anything like that without seeing like, ah, we’re all screwed. Limitless is a place where at least you can get some more clarity. You have people that are actually in the field doing it. They can say, this is what I’m seeing, this is what I’m doing. I leave Limitless every year with just a book full of notes going like new ideas, new strategies, and new concepts.
Even what I’m doing right now in my real estate business is 100% because of hanging around guys like Ken and the other speakers and seeing what they’re doing. I don’t know about you, Clint. I hate looking at market research and all that stuff. What I found that’s way easier is having Ken and all his friends do that. I’ll go like, what are you guys doing? I just copy, rip off, and duplicate as much as possible.
Clint: What’s the hack they teach you there? You just don’t get from looking at market research, hey, yeah, they say this, but this is how I’m putting the deal together. This is what I see that’s working. I find that to be so intriguing about this event. The other thing is, as you stated, it’s not just real estate because there are other ways to make money besides investing into real estate. You can create passive income streams, and that’s the thing that blew me away. How many people that were there that just weren’t real estate investors, they were there to learn these other strategies?
Tarl: Yeah. They were there for also to find a place to put money. There’s a lot of accredited walking around, Limitless for sure and whatnot. I love it. If you guys are interested, go to go.limitlessexpo.com. You can use the discount code, TARL10, to give you an extra discount. Prices do go up on a regular basis, and the next price increase is going to always happen at the end of the month. The event is July 31, August 1st, and August 2nd in Dallas, Texas. Massive conference, great time. Definitely be there.
Clint: I’ve watched what you’ve done over the years because you’re a client and. As you stated, buying the properties, knowing how to flip real estate allows you then to evaluate deals because I grew up in that. My father would buy properties that were run down. We would go in, we would renovate it, and you would turn it into a rental. It was all value-add. How important do you think understanding the ability to value-add into real estate is in this market?
Tarl: I think it’s crucial for a lot of reasons because you see value and opportunity where maybe traditional investors don’t. I’m buying in a very old part of the US right now that a lot of these houses are a hundred plus years old. A house that maybe hasn’t been remodeled or fixed up in 50-60 years or longer would scare a lot of traditional investors. It absolutely should, actually. Somebody that’s been doing properties like us for a while, we’re like, oh, cool, we could provide value.
Additionally, if you think about other than buying, even if you bought raw land, you still have to understand how to maximize the value of that property. Sometimes it’s development, sometimes it’s paper lots, sometimes it’s sitting on it. Who knows, right? It’s infrastructure. If you’re buying to build, you got definitely got to understand construction. If you’re buying multifamily, doing tenant turns, doing unit turns, if somebody moves out, you still got to go turn the property and so forth to be able to get another tenant in it, even if you do it cosmetically.
There’s just a massive amount of rehab, construction, maintenance when it comes to real estate. The more you commit to it and the more that you lean into it, the easier this business gets, not harder. It gets harder when we avoid it. I’ve just seen too many people come into this business and want to avoid learning all that stuff. I don’t know if that answers your question, but that’s just something I’ve seen over the years.
Clint: People want it easy. A lot of people invest outside of their geographical location. That’s oftentimes driven by the cost to buy the property or the return. Don’t you think that the people that are making those types of investments outside of their area, they do so because they don’t know how to make their local market work for them because they don’t have the experience?
Tarl: That definitely is a good point depending on their local market. Let’s say you live in Seattle, which is where I met you. Seattle houses in Tacoma are a hundred year old houses. There actually is quite a bit of competition in that market for sure. I spent a huge chunk of my career in that market to the point to where even the off-market deals have more competition than the on-market deals, which is crazy to think about, but it is a very true statement.
If you’re in that market, you see price points high because it is. You also see construction costs are high. You can have a a hundred thousand dollars rehab go to $160,000 pretty fast in Seattle if you’re not aware of how to manage it. A lot of people don’t use GCs there anymore because they’re too expensive and all these factors. If you’re in that market and you’re just trying to get a 6% or 8% return on your money, that’s going to be pretty hard to do, actually.
Looking outside of the market, it is something a lot of people do do, especially if you have any active income. Maybe you have a good job, maybe you have a good business, maybe you’re a doctor, lawyer, or whatever, something like that. Maybe you sold your house and you have a lot of cash sitting on the sidelines and you’re just looking for a good place for ROI, yeah, there’s a lot of other better places in the US to do that in, have less risk on the construction, and less risk on the value-add of the deal for sure.
I actually don’t recommend people that are in those type of markets that unless you want to commit to learning how to remodel a hundred year old houses, then maybe you should actually be looking at a different market. That’s my belief at least. That’s what I’ve seen over the years, I’ve also seen what happens to people if you have a full-time job and you have to sub stuff out and work on it on the weekends. I’ve also seen people lose a lot because they’ve decided to take that on instead of leaning into it.
Especially right now, houses are sitting on the market. Depending on the market you’re in, there is disruption right now in the market, which I also think is an amazing time to buy. I think it also pushes a lot of people outta the market right now as well. Not sure if I’m answering your question.
Clint: You did. You made a point there that I think is important that people hopefully picked up on. Every market, you brought up Seattle. There are opportunities there now with putting in the ADUs in smaller dwelling units. You can get more value back from those deals, more rental income. At the same time, when you see that opportunity, what you stated was, hey, you got to use a GC if you don’t know how to do it. That’s going to drive up your costs. Or you’re the person that is busy and you’re trying to do it on the weekends.
My father was that way. He would do it on the weekends. He had two two indentured servants. My brother and I, we would help him. He would go into work at 6:00, he’d be off by 2:30, and then we’d go work for three and a half, four hours on his properties every day. If you don’t have that type of drive and that type of commitment, then it’s tough to take a deal and make it profitable.
I know myself just building a chicken coop. Trying to do it on the weekends, it’s a lot to try to fit in just to do that. I can think about taking on a house. Learning the strategy for your market, seeing where the opportunities are is one thing, but then it’s also that other side is, hey, how do I make this work for my lifestyle and where I’m at? That’s why you said investing on a market.
When you bring up disruption, is this the time to buy? A lot of investors we’ve seen here at Anderson, we gauge investor activity based upon how many LLCs are creating because as we’ve done for you, we create separate LLCs. I don’t know how many you have now, you have just gobs of them. When they’re not setting up as many LLCs, it tells me they’re sitting on the sidelines and they’re not buying. You brought that point up now. Could you talk a little bit about the disruption in the market and why people should be buying?
Tarl: Yeah. There’s a good buddy of mine many years ago that started buying in 2009-2010, whatever. He looked like a genius. He was out of Portland. He looked like a genius to everybody with what he did. He did not look that way at the time, and people thought he was crazy. There’s a quote he said that I always loved repeating that’s investing in hindsight right now, hindsight’s 2020. “If only I started in 2009, if only I started 2010, oh, my God, I would’ve bought so much, whatever.” He said something, he’s like, “If you’re not the type of person to run into a burning building, you’re probably not the type that would’ve invested back then.” Because everybody else was running away from the market, not running towards it.
Even right now, the news cycle and social media cycle is so fast, so hot, everything. Every person that has any influence, a social media page, or whatever is all like, the market’s bad, I was right, this is horrible, it’s all going to cras, but it’s also hot to talk about it. It also almost becomes a self-fulfilling prophecy too. I definitely saw that in 2018.
I don’t know if you remember this, Clint. In 2018, there was a blip in the Seattle market for sure, where everything just stopped for a moment because the rates went up just a little bit. Everybody freaked out. It was only a three-month period. One hundred percent, if you look at what happened in that time period, it was completely self-fulfilling. Every realtor, every broker is like, market’s crashing, don’t buy. They held all their clients back from doing it, even though the rates only went up a little bit.
Three months later everybody’s like, oh, nevermind, let’s start buying again. I don’t know, I just remember that. There’s people that are still recovering from that little blip during that time period because the market kept hockey sticky. It wouldn’t stop going up.
There’s a little bit of that because if we look at the fundamentals of what’s happening today, there’s still a massive supply issue. Even though the demand is low, I believe that’s temporary. It also depends on what market you’re in. Yes, there absolutely are real estate markets out there that aren’t doing that well, and they might not do that well later. There is also an amazing amount of real estate markets that are doing very well because there is no national real estate market when it comes to real estate.
There’s hundreds of real estate markets and even submarkets of submarkets. If you think about Seattle, there’s a big difference between Seattle and Bellevue, but there’s also a big difference in Seattle between West Seattle and Madrona. There’s a big difference between Madrona and GreenLake, and there’s a big difference between GreenLake and Del Ridge. There’s a big difference between block to block, depending on what city you’re in.
I’ve been to Chicago multiple times, and I used to invest in Chicago many, many years ago. It literally could be across the street. Across the street’s a completely different market. Because of that, knowing our markets and knowing our sub-markets in whatever market you decide to invest in is crucial right now. It goes back to what are the job growth. What is the actual infrastructure of that city? Is there demand for people moving in still? If there is and there’s a supply issue, then long term we’re good to go as far as that market’s concerned. Whether rates go up or down, it shouldn’t really matter as much in the long term.
Short run though, that’s where you get hurt. As a recovering house flipper, Clint, thinking only four to six months at a time, yes, you can definitely get hurt in that time period. I have in the past thinking six to 10 years out. I’m not really worried about that because I don’t know anybody that’s ever said, man, I wish I sold all my real estate 20 years ago. My life would be way better. Nobody’s ever said that.
I could tell you right now as a house flipper, the only projects that I don’t like are the ones that are in the middle of construction during a turn when things are changing, and they only work as a flip. For me, I try my best to focus on properties that have multiple exit strategies, such as they work as a rental and also a flip. If that’s the case, if the market shifts, then I could still rent it out and handle it. If the market doesn’t, I could always flip it. I totally forgot your original question already, but I started talking.
Clint: You said something that’s really interesting there. You buy a property. Even if you think it’s going to be a rental, but you still buy with the mindset you could flip the deal. Either way, you can make money on it. It doesn’t make money as a rental. You could just flip it and you’ll make money that way. That’s insightful.
Tarl: It’s being able to have multiple exit strategy. Back to disruption. Yes, there is disruption right now. If people are running away, that’s when we should really be looking. If nobody’s buying, that’s when we should be buying, and that’s when people are panicking.
I live outside of Austin, Texas. Austin, Texas has so many houses on the market right now because so many builders just finished their building. They also have a lot of rentals on the market right now because so many multi-families just came online. Right now, that’s a win if you’re a tenant because if you’re a tenant right now, having three months free rent was probably not the business plan of that multifamily when they got done with it. That’s great for the tenant.
Right now, I live right down the street from a new development that just came online. I live in rural part of, outside of Austin. I’ve never seen so many properties on the market right now. Right now is the time to low ball offer people, and people need to sell and thinking long term.
As a house flipper, there could be a hesitation where even that low ball offer I’m giving might not be low enough if the market continues to stall out more. That’s why we have to think through that. If I’m a landlord or a BRRRR investor, that low ball offer that that property still is going to pay me the rent that I need, that is great. Now’s the time to be taken advantage of that and whatnot, so not the time to run away from it.
Having that multiple exit strategy helps protect us and mitigate risk. I think the biggest message I can give to people, Clint, is that investing’s not about profit, it’s about mitigating risk. We want to protect our downside first, profit second, so protect the principle. I think that anybody that’s been in this business long enough, even not even in real estate, any investment type sake, if you talk to the people that have been here the longest, they all say they mitigate risk first and then they look at profit, not the other way around.
Clint: Yeah. One thing that came to mind when you were talking about that is that I was talking to my son a couple of months ago when he was looking at some property in Ohio. He said, dad, this property here is, I think it was an eight or nine-cap property, and he said this, this looks like a really good deal. I had to break it down for him and show him that in those types of markets, because the property he was looking at was about $150,000. The rental income on that made it an eight-cap. You’re making maybe $10,000 a year off that deal, whatever it was.
I showed him, I said, an eight-cap in that market versus an eight-cap, and you brought up Portland, which I mean the hellscape that place is right now. It’s amazes me that there was an article on the Wall Street that it’s still prices are going up. You pull an eight-cap out of a Portland market where the average price is going to be $700,000, you’re better off going into, and I’m not saying invest in Portland, but that type of market because what so many investors do not calculate, what I’ve found and I’ve made this same mistake myself, when you have a term, because a tenant leaves that property, maybe they leave early or the victim, the turn cost is going to be relatively the same between Ohio and Portland, in my example. The difference is it’s going to 70% of your profit in Ohio versus 10% of your profit in Portland.
I found that when you evaluate cap rates, I also have to factor in what is my cost, my capex, my turn on that, and how much of that gets eaten up, and also the appreciation factor that you’re going to pull out of those properties. I think when people invest out of state or they look in certain markets, sometimes they’re not thinking that all the way through because they’ve never been in that situation, which I’ve been in, on some of my deals where I’m doing a turn. I’m thinking, all right, it’s going to take me two years to recoup this at the rental rates where I’m at.
Tarl: You’re making an extremely good point. There’s a number of people that get into this industry and they go like, I need to find cheap houses, $100,000, $150,000, $160,000, whatever. I could just go to this market and buy a house for $80,000. Is that a better way to start? I usually say, hey, a $10,000 roof is $10,000 on an $80,000 house, as well as a $250,000 house, but your ROI massively changes on that.
It’s not saying that you don’t buy cheap houses, I’m just saying that we have to go into a full eyes wide open situation. Typically, an $80,000 house in today’s market is because it’s in a very unappreciated market. You’re not going to recuperate that through appreciation.
The other key to single family, Clint, that I’ve learned over the years is that you’re not going to build lifestyle changing money with a $200 rent house, where you could cashflow $200, especially with tenant turns. You spend $2000 to repaint the property, you just got rid of your entire annual cash flow on a $200 a month cash flowing property that you have debt on.
For me, I’m totally fine with a $100-$200 a month per door cashflow all day because I’m not looking at that property as what’s going to change my lifestyle. I’m looking at that property as a 1031 exchange opportunity to roll up into another better property over the years that will become the lifestyle changing type properties. My bigger process right now today is I’m forcing appreciation through construction and rehab. If I buy-in a hundred thousand dollars property, putting $50,000 into it, and it’s worth $200,000 when I’m done, I have $50,000 of gross equity before costs and all that great stuff that happened.
If I sold it, maybe I make $35,000 because of cost, holding cost, sales cost, whatever. I’m going to pay taxes on that $35,000 today, which means I’m going to make less, so call it 20 or whatever, depending on my income bracket at the time. Entity structures. Okay, I can make $20,000 grand a day or I can leave that in the piggy bank, which is my savings account, which is not selling the property. I can leave that in the property and I’m getting $200 a month in cash flow, let’s say if I have debt on it. In that scenario, if my net equity’s $35,000 and I’m getting $200 a month, so that’s $2400 a year, my return on equity is something around 8% or something like that, give or take.
Clint: Plus, yeah.
Tarl: Something like that. I’m like, okay, cool, that’s better than my savings account in my bank. I’ll just leave the money there. Three to five years from now, let’s say that property’s worth $250 because it’s in a market that’s going up because I chose a market that’s going up, and I decided to sell it. I’m going to 1031, and I’m going to take that equity and put it into a property that’s going to cash flow instead of $200 a month. Maybe I could cash flow $600-$800 a month now because I have equity to do that in. Three to five years later, I 1031 exchange again. Maybe I take five, six, or 10 of these that I’ve accumulated and 1031 all of them into a multi-family property of some sort or whatever down the line.
The thing that changed my entire thinking on this was this guy, my buddy, Thatch Newen, his mentor is this guy named Saul that’s out of Washington, an old school dude. He’s like, you 1031 C class properties to B class, and you 1031 B class to A class over time, and you keep doing it until you have a property that you would personally live in if you had to, and then you stop selling at that point. Not that you would live in it, but you could live in it, which means that it’s nice enough for you. So 1031 until it’s a property that you would actually live in if you wanted to.
Clint: Nice enough for your wife, so let’s qualify that.
Tarl: Yeah, totally. I agree. I could live in way worse properties than my wife did. That changed my entire thinking to go, okay, all these properties I’m keeping today and in the past are not my end-all properties. It’s the ones that I’m going to 1031 into in the future. Those are the things. That’s why I like single family because if I bought a hundred unit apartment complex, I have to sell the entire a hundred unit apartment complex.
If I buy a hundred properties like single family or duplexes, whatever, I can knock off 20 of the worst ones and 1031 into something else that’s better as it goes on. That’s the long-term thinking. That’s also when you’re forcing the appreciation with construction, you don’t really care as much about market appreciation because you already forced the appreciation and you’re just delaying the taxes. I don’t know if any of that makes sense, but that’s in my entire investment strategy in how I think about this stuff.
Clint: We have a lot of single family homes in Winston-Salem, North Carolina. They cashflow $800 a month on average, these properties. My assistant just reached out to me and said, hey, that house we bought in that package, we need to put in $20,000 into it and capex to bring it up. Again, we’re only going to be making $800 a month in it. You get tied up in having. I’ve got all these homes that I want to have.
Really, what I should be doing is taking those properties, what you just stated, 1031-ing a lot of them, and then moving up in property class. We’re at a property class, it’s great. They’re C, D class properties, but I need to be in the B class properties. I’ve always thought just go out and buy them. Really, she was taking what I currently have. I’m going to be rethinking my strategy now.
Tarl: Yeah. It’s looking at your return on it. What changed my thinking was back in 2019 when I did my first 1031. It was the first time I felt like an adult in real estate investing. I was like, this is what Rich Dad, Poor Dad was all about. This is what all these things were like, I’m finally a real real estate investor. I had a two-bedroom, one-bath house in Tacoma that I bought in 2016.
By the time, just because of market, whatever, I was always cash flowing only $300 a month into it. Every month, I had $9000 left in it, so it was a good ROI. I looked at it, we had a tenant turn, and I was like, well, if I sold it right now, I’d have $110,000 on this little two bedroom, one bath house. I’m like, okay, let’s see what the grownups do and do a 1031.
I took that, and I bought a commercial building in downtown Tacoma with it that was fully remodeled already. It was on the market. Just remember, this was the point. I was only getting $300 a month in cash flow on $110,000 of equity. If you do the math on that, that’s 2.5% or whatever, or give or take 2%-3% ROI on the equity. I took that $110,000 and I put on this commercial building. That commercial building generally gives me a thousand dollars a month in cash flow. I put no extra money into the building, I just put that $110,000 and rolled it over.
The same $110,000 is now getting 10% return on equity. I didn’t have to do anything else, I just moved it over. It took three to four months to rent it out, but it’s got a five-year lease on it now, so it’s great. It also appreciates over time because commercials are great. I like commercial buildings, but the right ones by the way. Doing that 1031 made me start looking at all my properties for ROI on equity. My cashflow was great five years ago, but my equity’s up. Is it still great? Can I move that equity to something else that gets me a better ROI on that equity and a 1031.
If you don’t know what you’re going to do with the money, then don’t sell it. Don’t ever sell it because you have 45 days. I’ve had at least three failed 1031s already, and that’s three too many for me. It’s having to take that capex hit because you couldn’t find a building, you move too quickly, something falls apart, or whatever. It sucks, so don’t do that.
Clint: Or you do the reverse.
Tarl: Dude, one of my best deals is a reverse 1031 exchange for sure. It’s funny that you brought it. Most people have no clue what that is, Clint.
Clint: Yeah. Why don’t you explain to them what a reverse exchange is?
Tarl: I’ll just tell you the one that I’ve done. Another commercial building, but this one was a mixed use, which I love mixed use in the right markets and right spots. This has three apartments on top and it has three commercial units on bottom in downtown Tacoma. The property was off market for $760,000. I was like, okay, we got to close quick. I didn’t have a property I was going to go sell at the time. I always happen to have a property that the tenant just turned. I’m like, cool, throw it on the market. I had to close on the commercial purchase right away, so I couldn’t wait to sell the other property to be able to do a traditional 1031.
A reverse 1031 is where you buy the property first and then sell the property that you want to 1031. It’s basically a delayed 1031. They take the proceeds and then they put the money into the property you bought for the 1031, and then they close it out after that’s done. You have to have a 1031 exchange company that will do that, which most will. You also have to be able to buy the property without the 1031.
Additionally what happens is that, this commercial building, the 1031 Exchange company closes on it and they take title of the property. You are the beneficiary of the entity. They create a new entity where they run it, they’re the managers, and you’re technically a member, but they have full control of it, you don’t. You have to have a lender that’s cool with that because you don’t technically have title or clear title in that scenario. Your lender has to be cool with that. That’s traditionally going to be a hard money lender, private money lender. You’re not typically going to get traditional financing on this.
We had to do that first, and then we put the property up that I sold on the market. It sold quickly and it had about $250,000 of equity, give or take. That then gets closed by the same 1031 exchange company and they take that money. You can’t touch it, don’t touch it. They then take that money. Once they have that, they take your money and they put it onto the building you just bought, if that’s what you want to do. It’s not what I did. I did something a little different. Then they close out the 1031, then transfer the title of the entity over to you, and then you’re done. It delays. It’s more expensive, takes a bit longer, all that great stuff, but it’s awesome when you do it.
What I decided to do was buy the property with a private money lender. I love private money lenders. If you’re out there, email me. I bought the property with a private money lender and then I took the 1031 that I had, left it with the 10 31 exchange company, so the $250,000-ish thousand dollars that was there, they held onto it, and I used all of that money for construction instead. You have six months basically to use the money, and then they have to close it up.
Over that six-month period, every time I had an invoice or a bill from a contractor, I would send it to the 1031 exchange. They would take basically a construction draw, they would take my $250,000, and they would send $30,000 to the roofer, they would send $40,000 to the GC or whatever. They charged me a transaction fee every time they did it. It was $30, $50, or something. They did that and they did that with the 1031 exchange money.
I spent every penny of that $250,000 on construction, that building then appraised for $1.6 million when I was done, and I owed about a million on it. I did a refinance into permanent financing with one of the local banks on a commercial loan on a $1.6 million building that I didn’t have a $1 million loan on, and I have no money in it. I actually have $40,000 into it, actually, that’s not true. When all the units are rented, the cash flow is $5,000. That was from a $380 a month rental. That I had that.
Clint: It’s amazing how that works, huh?
Tarl: It’s awesome. It’s my favorite deal I’ve ever done for a long term. Yes. I totally was not planning on talking about that. House flippers, Clint, get so focused on buying a deal in construction, buying a deal in construction, buying a deal in construction, but investing is about getting an ROI on your money. That’s all right. We’re taking dollars and turning them into more dollars. Becoming a student on actual investing tactics and investment strategies is where it’s all at.
The construction’s a tool that allows you to get a better ROI, but the whole point of learning it is not so that you can learn how to install cabinets. You learn it so you can get a better ROI. It’s not so you can do it too, it’s so that you can hire other people to do it so you can do more volume and get a better ROI. Everything’s about that ROI return on investment, or else why are we doing it? We’re just replacing a job for a job at that point.
Clint: Yeah, and that strategy, what you just mentioned, again, you have to buy-in the right market where you’re going to have the appreciation where that can work because there’s a lot of markets out there that do not appreciate. Yeah. They throw off that they’re cheaper houses, they throw off cash flow, and we’ve already talked about the issues there. You’re never going to be able to roll those unless you’re able to force appreciation in that property by doing the rehab work so then you can get something, which you can move it into another deal like you talked about. Hey, thanks for coming on and sharing the time with us and your insight into the market. I really appreciate it.
Tarl: I appreciate you. Thank you for the time. I love this topic. This is great.
Clint: Yeah, it’s awesome.
Tarl: Thank you for being my attorney too. Clint has been my attorney for many, many years. We didn’t even talk about that. I remember I didn’t have any of my asset protection stuff set up until I met Clint. I actually met him through Rich and Kathy Fettke. As soon as I sat down, I’m like, man, I’ve been doing this wrong. There are things that have happened in my business that if I would have set it up the way that Clint and his team set it up originally would’ve reduced my headaches, for sure. Those are long stories, every one of them, but there’s definitely a lot of learning lessons there. The sooner you get this stuff set up, the easier life is in real estate investing, absolutely.
Clint: Thanks, man.
Tarl: All right.
Clint: Take care.
Tarl: Thank you. Bye.
