Buying a Distressed House Is Easy. Operating It Is the Real Challenge. | Ep 130

James
Pop quiz, after you buy a house, what's the very first thing you should do?

Jessi
Well, we usually um make mac and cheese. That's the very first thing that you do Well, I don't know, you signed a bunch of paperwork. Well no, like you've already done that part.

James
You've already done that part. This is you bought it. You like you're done, you're closed.

Jessi
Now what? Yeah, we go have mac and cheese.

James
That is one option And we're gonna talk about what you should actually do today on the Furlo Capital Real Estate podcast, where we dive into the intricacies of passive real estate investing. And I will admit, my secret goal for this episode is to make you go, I don't want to do this, I want to invest with James so that he can do it.

Jessi
He can do that.

James
That's my goal, just to describe the process. And that's because our mission is to equip people to invest wisely in both property and people and all the steps involved in doing that so that together we can build wealth while improving housing. I'm James. And this is my soon to be overwhelmed wife, Jessi. Soon to be overwhelmed. Oh, a hundred percent.

Jessi
That's my goal. Okay. Well, yeah, that I guess that's true. That way I can be like, oh yeah, I would like you to do those things. I'll make the mac and cheese, I guess.

James
All right. Yeah. Mac and cheese.

Jessi
I don't know what the first thing is you do.

James
Yeah, so we should probably exp drive over there. We should explain that a little bit more. So we have a tradition.

Jessi
That's true.

James
That's true. I don't feel like we we don't do it anymore, but that's just cause you're not Well, uh I'm not really kind of in the mix of it.

Jessi
Also I think in those places of tradition was like we bought a place And we we're gonna move into it. The first night we sleep there.

James
Well, we at least would just make a meal. Or at least yeah, at least make a meal. You don't remember what we did.

Jessi
And then we slept there for for

James
I don't think we did. Several of them. I don't think so.

Jessi
Well, maybe not all.

James
We we would grab a blanket and we would have mac and cheese on the oven. Hang out, but then we would go sleep on our own bed because there was no like there was nothing there. Now we would we would make the meal and then go around and start our like here's the punch list of like yeah and then we would it's a top priority. Yeah, totally. Which is an option. Now anytime I close I celebrate by getting pizza. Yay. Which is still fun. We like macorni and cheese ones fine. But oftentimes now we're buying houses, distressed houses specifically, where it may or may not have an oven and I'll be honest, I don't necessarily want to cook off of it. So We don't do that.

Jessi
Oh, that's bad.

James
But I totally get it. Yeah. Exactly.

Jessi
First thing, don't walk inside.

James
Yeah. Well, so so here's what's interesting, right? I think that at least this is what I think is interesting Is that there a lot of focuses on the finding of the deal. Yeah. And getting the deal and closing it and doing that. Yeah. Which is generally fun and exciting and I get why everyone likes it. But man, that's not like that's the start of the race. Oh you know, yeah. There's a lot that have to do afterwards. And oftentimes with distressed, specifically distressed properties, that means that there's deferred decisions that have been made on this, not just the maintenance piece of it. Yep. It often presents itself as that, but there's just been a bunch of stuff that hasn't happened. I also think if you're even if you're not necessarily how do I say it Uh if you're not investing passively in a deal, even if you're like, hey, I have now bought this and I'm hiring a property manager to go do this for me, it's good to know. Here's what this process is. Because you can very much, if you wanted to, buy a dispressed property and then hire a product manager to say, hey man, get this thing ready to rock. You could do it. Doesn't happen super often, but it but it could happen. Alright, so this is the checklist.

Jessi
Ooh, I like the checklist.

James
It's not comprehensive, but there's a lot of checklists. It's like a starting checklist. Alright, so number one thing you gotta do, secure the asset. Which often means change the locks. That makes sense. Yes. Unless you buy as really bad as we do sometimes, like we know. It's all good. We've we've had situations like that we're like this is not secure. It's um security by obscurity. No one knows that the back door doesn't actually lock.

Jessi
So yeah. Yeah.

James
So Yeah, you also want to make sure utilities get transferred into your name. Oh. That was actually super annoying. I we've had to add that to our checklist because we've had it where we're like, oh, let's get people in there. And like, there's no power. You can do this if you want to. You can do a video walkthrough of every room, do a narration, make sure it's time stamped, just to like Hey, let's just catalog what we're doing. It's funny, we did a project earlier today. And it was funny, we got to the end and you're like, oh, we should have taken the two.

Jessi
I know, it's like, oh, I wanted to be four comparison. Interesting. You just yeah, like Essentially, yeah, take a timestamp, a log. Here's what it is.

James
And depending on where you are in that process, you may have already Looked for mold and water problems, pest things, foundations, panels, you know, all those things.

Jessi
Make a note of what has to happen.

James
Correct, correct. It's non-negotiable. You also want to check your smoke and CO2 detectors. Because if you're buying distress, there may or may not be a realtor involved. If there's a realtor involved, they will Generally make sure like they have to be. Yeah, safety things happen. But it's just good to like, let's just press the button, make sure we're good and and swap them out. Because you don't Though we've had a couple we're like, oh this will actually be better if it burned down. But as a general rule, you don't want that to happen. Yeah. Uh if there are any squatters or abandoned property or vehicles, again, you just want to document. all of that. Document or do something about it. This is day one, you know.

Jessi
I mean You need to do something about it, but I get it.

James
Well, well, for squatters, Oregon's weird.

Jessi
Yeah, that's true.

James
You gotta document it and then go through the process. But you wanna be like, hey, I got this day one. Because The problem with squatters is if you know about it and don't do anything about it, then that becomes an issue within a s within a limited amount of time. And I've actually advised and talked to people where that's the case, where like, hey, this person moved in, they're not on the lease. They've been paying rent, but now I don't like it because he's smoking, doing other stuff. What do I do? And I'm like, well, how long have you known about the person? Yeah. Because that matters. Because if they've been there, I believe I'd have to look it up, but I believe it was like if if if you know them for three months, 90 days, and you haven't done anything about it, they get to stay. They're kind of on the lease now. Wow. Bummers. So that's why you document it right away. Yeah. Get that going. So then what you're gonna do is depending this kind of depends on the project, uh the scope of it, but you now you're in planning phase.

Jessi
Yeah.

James
So you're gonna get like potentially a structural engineer out there to look at things? Maybe. Kind of depends on the house and and the building. What you notice. You're gonna get a plumber out there to start looking at um what the plumbing situation is, they can do it. Same thing with the electrician, same thing with the HVAC and the roof. You're just you're getting it you're getting all those people. And depending on what you've seen, it may make sense to go and pull the permit history. Now some of these things you're gonna do during the during your due diligence, but

Jessi
That's what I was just thinking, is like, don't you get an inspect an inspector during your due diligence and they kinda m kinda make you a list? It depends.

James
Like for oftentimes for what we're doing is we're making quick offers, we're moving fast. Right. We're doing our own walkthrough. Yeah. Kind of do some estimates, getting super conservative because we know there's gonna be some what? Sure.

Jessi
And so I suppose if you know you're gonna if you're gonna fix everything and that's the plan, you don't necessarily need to have it all diagnosed ahead of time. Exactly. You can move quickly. Have the deal go through and then diagnose and fix. Yeah.

James
But and it's not just oh we can move fast, but it's also we're not gonna be super intrusive. We're just walking through, we're making estimates. We're not gonna drag this out for three months so we can get all of those people in details. Now bigger building, yeah, you're doing all this stuff ahead of time as you should. But this is this is distressed is what we're talking about. Uh yeah, those are what you're gonna pull from it. Okay, now you're gonna do some other things potentially. You're gonna start testing for lead paint. You're going to test for asbestos and kind of the year of the property matters for this. If you do find it, you're going to get a licensed abatement. company in there to kind of do it yourself. And you're gonna want to do all that before you start any cosmetic work. Yep. Uh for sure. And oh uh there's other stuff too depending on Um how you've structured the financing of this, it's just looping back with title, just to making sure all the right paperwork is in place. It's It's kind of weird, but I've had this where it's like just weird stuff happens after the fact. We're like, oh, I thought you were gonna record this or not, or something like that. So it's just double checking. that all the things are done. If it's in an HOA, you want to catch up with any dues, violations, pending assessments, that kind of stuff And you're just going to confirm that insurance is ready to rock and potentially add an umbrella depending on your situation and and where you're at. So like it's just a lot of you notice we haven't even swung the hammer yet.

Jessi
That's yeah. It's kind of a long list.

James
And and we've learned this through some hard stuff where it was like, oh, we do need to switch to the utilities. Oddly enough. Yeah. Yeah. Okay. Now we're getting into the rehab. Um I'm curious what you think of the order of a rehab would be.

Jessi
Um I would think health and safety first.

James
Uh no, I'm like, what's your first activity you're gonna do?

Jessi
Make a list of all the projects.

James
Okay, and then what?

Jessi
And then prioritize them into what to do first.

James
What's the first physical thing you're gonna do?

Jessi
Oh.

James
What do you do first on a project? Demo? Yeah, demo. Break it up first.

Jessi
Yep, yep.

James
Pass the first thing. And then what are you gonna do?

Jessi
Clean it up, prep work for whatever you're gonna Build or fish.

James
Yeah, so you're gonna do you're gonna do all the rough end work, so you're not doing the finishing stuff. You're then gonna get it inspected, and then you're gonna put up your drywall and start the finishing process. Sure. And typically you end with the flooring It's kind of a weird. I don't know. I've seen it both ways. Sometimes you do the flooring very first, then you put all the stuff around it, and sometimes you do it very last. I honestly don't know.

Jessi
It depends on what type of floor you're putting in.

James
I don't know. I've seen both. Yeah. It's kind of an interesting deal. But that's kind of the so yeah, you're right. You do want to get the scope of work kind of figured out. Ahead of time. If you're having other people do it, ideally they're making their bids and talking about it all, it's all written down. You then want to make sure you got your schedule kind of figured out. You may not have like specific dates, but at least you know here's the order in which we're gonna be doing things.

Jessi
Estimated timelines

James
Yeah. You're also gonna think through your draw schedule. So so for us, we get all the money from our investors up front. So we just got a pile of cash. And then what we do is we actually put it into a high yield savings account. 'Cause you know, I'll earn four percent on my money if I'm not touching it. But then we have to think about when are we going to need those funds and do draws and so we'll kind of we'll have those in a calendar. Um it's really easy. For some of the people we've worked with, it's super easy because they tell us ahead of time. For others, they're like, well, I'll let you know. I'm like, well, we need a three-day hands-up. Yeah. And so So we'll kinda we'll we'll move it back and forth. We just joke, we're like, ah, this is pizza money. Because it does it, but I mean it's a couple hundred dollars, is what we get out of it. And we're like, yeah, cool. And um Yeah, you also uh I think I said this for work that needs to be permitted, you just want to make sure that's all happening. I'm honest, like we don't do the work ourselves. We have other people do it, and so they make sure all that happens. Uh you do want to make sure you got a good buffer in the old budget. Ah, that's the thing, especially if you're getting started out.

Jessi
Right. You're you're always, I feel like with distressed properties, you're always gonna find something else.

James
Well and you well and you run into it's the oh we might as well phenomenon.

Jessi
Yeah.

James
So you take this wall out, there's something old there, you're right here, you're working on it. Yeah, we might as well just replace it. You and I were working on a project a couple days ago. We definitely we had to fight that. Oh yeah, we just be like right now. This isn't perfect.

Jessi
That's a different project.

James
Thankfully that one was like, we're gonna have to go to home.

Jessi
Yeah. I can definitely see myself being like, well I since we're out here, yeah. Let's just do that a little bit more.

James
Well Yeah, that's hard. So that's

Jessi
Set boundaries.

James
Yeah. And that's why that's part of why you inflate your budget. Because you you know it's you don't know what it is, but you know it's gonna be there. And so that's definitely a thing. And um yeah, and then honestly you're just like at that point, you're you're into it. You're If you're doing your work yourself, you do the work. If you're the one coordinating contractors, you're sticking with the schedule, making sure things happen. If you've hired a general They're doing it. A lot of what you're doing is uh showing up regularly and being available to answer questions. It's kind of it's kind of funny. Uh I don't know if you've you might have experienced this in other places, but We'll go and he'll have like three to ten questions for us. Mm-hmm. Like, man, what would have happened if I had shown that? You know what I mean? He's like, were you gonna text it? He never does text them. Yeah. So I'm like, I'm glad I was here. And I don't know, maybe it's he goes, Well, he's gonna be here eventually. I'll just hold off and wait. I don't know. Maybe. Or he doesn't need them answered right away. So, but since I'm here since you're here, might as well ask. I don't know. But I've I'm regularly like, why? All right. Glad I showed up. Um this happens in other places. Oh it definitely happens. Totally a thing. Yeah, just pretty funny though.

Jessi
Yeah, since you're here. Can I ask this or that?

James
So that's what you're gonna do, right? Now, once the rehab is done, you now move into whatever that next phase, and it's really gonna depend on what your exit plan is. Sure.

Jessi
Whether it's renting it out.

James
Yeah, if you're gonna rent it out Maybe you're doing it yourself, maybe you're hiring a property manager. I would get the property manager involved a lot earlier in the rehab process just so they can start thinking about it and getting it on their horizon. It doesn't have to be crazy early.

Jessi
Is that just so when it's done that it's ready to rent

James
Correct.

Jessi
Like they've already done all their lease write-outs and whatever.

James
Yeah. Potentially. I mean, honestly, you can't really rent a place until it's done because tenants have zero imagination, which is fine. And so you kinda gotta wait until it's finished before they can take the photos and get it listed. So they can't make a lot of moves, but they can at least get it in the system and be ready for when it's done. They can also have an opinion about some stuff. Hey, what kind of carpet should we use for this or whatever That kind of stuff. Yeah. Or if you're getting ready to sell it, then you're moving into okay, we're gonna foot we're gonna photography this. We're gonna take photos of it. Yep. We're potentially gonna stage it. Kind of depends on what you want to do there.

Jessi
Mm-hmm.

James
And yeah, uh oh, I also think this one's kind of an interesting one. Not a lot of people do it, but I like it is, and I'll be honest. We don't really do it either. Uh it's just doing a move-in inspection. And so if you're gonna sell it, that's a really interesting selling point to be like, hey, we had this thing already inspected just to make sure all the work was done. We're good to go. Yeah. If you're if you're gonna rent it, then you definitely are gonna do a move in inspection as well. They're they're two different things related, but uh, but different things. And so um Yeah, so that's that's kind of at a super high level what you're gonna do, but it's there's a whole bunch of steps at the very beginning.

Jessi
Yeah, before you even get in there and start working, there's a lot of like just verifying.

James
Yeah.

Jessi
Of information and documents and ball ring.

James
It's a thing.

Jessi
Yeah, you're right. I would like someone else to do that. Yeah.

James
Thank you. I appreciate that. Uh and so it's I was thinking about and um one of the things I thought about was like distressed investing. It's not that it's necessarily harder, it's It's just less forgiving because there's a whole bunch of weirdness that comes with it that you don't normally have to deal with. And if you forget to do that step or you just kind of, hey, we'll just go in and wing it. Yeah. That makes it harder. You really gotta have a plan. And sometimes you get lucky and the margins are amazing, but honestly, not they're okay. And that's and that's the risk, especially if you're doing a short-term thing. Oh man, like you gotta get it right. Because you can't say, Oh, I'll just I'll know it for fifteen years and then I'll look like a genius at the end and no one'll know that my returns are actually only five percent over the last fifteen years. Yeah Which definitely is a thing. And so um so the question is if you are investing yourself and you're buying a distressed property. Uh what are those phases that we talked about are you potentially skipping over and not really thinking through?

Jessi
Yeah.

James
And if you are a passive investor Uh the question is like, have you asked your operator about this? Hey, what are those steps that you take when you first move in? Sure. And um, yeah, just double checking that like, yeah, they're checking all the boxes and doing it. Uh I'll be honest, I actually don't have to do a lot of it because I got an awesome partner Yeah. Who he handles a lot of those things for me, which is fantastic. Oh, you know, someone's doing it. Yes. Yeah. That's right. Yes. Doing it. Yeah, yeah, yeah. Yeah, no, we're good. And um yeah, so so that's kind of the process, honestly. It's It's not crazy hard, but there's just a lot of things. We um we kind of go back and forth. Sometimes when we first got started, we did a whole bunch, we had a huge checklist inside of ClickUp, and that was how we managed and remembered everything. We've done this enough times now where it's it's not quite as super crazy detailed anymore. It's more like, hey, these are the the high level things that we gotta do. Yeah. And we're checking it.

Jessi
And you know there's A series of of things underneath each of those. Yeah.

James
Also, not surprising, having a really good contractor on your team makes a huge difference in that process.

Jessi
That makes a makes a big difference.

James
Which is really nice.

Jessi
They can get just give you Estimates faster and easier and Yeah.

James
Sure. Are happening. Which is nice. Even though, man, it could be just for when you're at the beginning and you're starting to open stuff up. Yeah. Because you create the plan. And then you start opening things up and they're like, Oh, okay, we need a new plan now, because we just discovered this thing. So that's oh I hate that I hate that phase of of the project. I'm I'm borderline like I don't even ask me. Just whatever. Just get it done. Just I don't care.

Jessi
Like, yes, it's gotta be fixed Once you make the final plan, then let me know.

James
Yeah. Uh, demo. It's it's fun to do, but man, it's that. Okay, now we discovered everything. It is the uncovering of it's just it's just that is like that's an emotional roller coaster I cannot handle. Yeah. But it's all right. So yeah, so there you go. So we do these kind of projects pretty regularly. And if you would be interested in buying or investing in a distressed house with us or you've got one and you'd like to eventually rent it out, turn it into a long-term rental. Love it. I was talking with a guy or texting with a guy earlier this week where that's what he's looking to do. And so we were talking about from a management standpoint. We're just trying to figure out like what are the rents going to be in this area and what should I plan for and stuff like that. So um it's totally a thing. So if you'd like to learn more about doing it with us, you can check us out at Furlo.com. So with that, thanks for listening. Have a great day