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After encountering Mr. Money Mustache about a decade ago, Ernesto Hernandez shifted his priorities and investing interests. He left his W2 and through prudent financial management, was able to help his mom buy a house of her own, and is now flipping houses full-time and serving as an investor agent in the Bay Area. In this episode, Ernesto goes in-depth with his BRRRRs and how this strategy taught him about flipping. It hasn’t always been easy—he’s had to back out of deals, he’s had property managers who took off with his money and contractors who didn’t finish their jobs. But through it all, he has learned from his mistakes, improved his process and is building a successful portfolio while helping others do the same.

Stay tuned until the end for solid tips on long-distance real estate investing, utilizing inspectors, and mitigating rehab risks from this man who has a lot of heart for his family – and quality tequila.

Listen to the podcast here


 

Mom’s House Comes First! Flipping & BRRRRing His Way To FI With Ernesto Hernandez

Z, how are you doing?

I am doing great. I am unofficially selling a house in St. Louis and our friend and previous guest, Sarah Weaver, may be putting an offer on it. I’m pretty excited about that. It is funny because, in this show, we talk about how people say that they regret every house they have ever sold. It did flash in my mind, but I think it is going to be good and be okay.

Didn’t you sell a house to Ben or did you not end up going through with that?

Ben is interested in the house too, but he has not made an offer yet. It is going to be the duke out. Ben was also on the show versus Sarah. We will see what happens.

We will have to put them in a boxing rank and maybe they can have a pillow fight to see who gets it. You will get that reference as we get into the show. We have got an interesting guest Ernesto who is a friend of mine. It’s crazy. We have only been friends since 2020 and it feels like it has been way longer because of all the COVID stuff that happened. He is doing some out-of-state stuff that is incredible. He gives a lot of solid tips, so be sure to read through the end because there is a tip he gives towards the end that is something I had never known before and mind-blowing to me.

This is a great show and I’m excited. I love that he went into some more depth and talked about his wife throughout the whole thing. That is the stuff I love. I’m a big fan of Ernesto.

With that being said, let’s bring him on.

Ernesto, welcome to the show. How are you doing?

I’m well and I’m thrilled to be here, so thank you.

I’m so excited to have you on. We met only in 2020, but there is a lot that has happened in that year and you were so gracious enough to host me, even though you didn’t know me. We have become friends since and I love your story. I want you to tell it to the world. Let us know. How did you hear about financial independence and how did you come across this journey?

First things first, I was willing to host you because I knew where you worked at that time. In terms of financial independence, what’s funny is one of the earliest blogs that I ever read. Have you ever read the blog, Mr. Money Mustache?

You bet.

That was one of the original blogs. It was one of the earliest that I have found. This was many years ago. Maybe not quite as long, but he had been at it. I forget how I stumbled into it. The entire premise that he preaches is that financial independence is attainable for the average Joe. It is not how much you make. It is how much you keep prudent financial management.

If everybody learns how to do that, then financial independence is super attainable and you don’t have to be the typical case study of people that don’t enjoy their jobs and work until they age and they can’t enjoy the golden years. He was the first person that set that light switch off for me. That caused me to then shift my investing interest from the stock market, which you have a certain amount of control over, but not completely into real estate. To answer your question, that is the first person that turned me on it.

Me, too and probably half the world.

I think he is in Colorado somewhere and then Craig shows up with a mustache.

I have been hanging out with him in decent amounts. He is maybe working to grow his mustache. He lives up in Longmont and I know I have got a membership to his headquarters. I know Z has been there a handful of times. Z, are you a member?

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I’m not officially a member, but I’m good friends with Carl and P so they invite me to everything. I’m there a lot, too.

This financial independence community is pretty darn small. We are happy to welcome you to it back in 2011. You are an OG, too. You are learning about it back then. You learned about this whole financial independence thing through Mr. Money Mustache. It is not what you make, but it is what you keep. What did you do about that? You read it, now what?

Some of the habits that changed in me are I started to be more careful about how I managed my money. I still enjoy doing fun things. Don’t get me wrong. I love to travel. When I was younger, I had an appetite for name and brand things. I thought that I wanted a Mercedes, a fancy watch and it caused me to shift my priorities and think mid-end and long-term.

I stopped doing those things. It was like, “I don’t value those things as much as I think that I do. I like the time freedom that this person has. If the sacrifices that I have to make is how I spend the money that I’m already making and not so much putting myself under this strain to earn more than I’m going to have way more control over my time, I’m not going to be one of those people.” Thanks to him and learning those things. That is where I started to make some adjustments.

What were you doing at that time? What were you doing to earn income?

I worked for Verizon Wireless for a long time. I was in a W-2 like most people. I didn’t enjoy it. I wasn’t happy showing up to work, but I did it anyway because it paid the bills and it provided me an income and the lifestyle that allowed me to live a comfortable life and then still have some money left over at the end of the month to stock away. At that time, that is how I was earning my money.

You were working at Verizon and you were starting to learn about this whole financial independence thing. This was 2011. You save a certain lump sum of money and then the whole idea is to go invest it. When did you start your actual investing?

One of the earliest pieces of advice that I received investing related whatsoever was, “Start your 401(k). This company gives you a 6% match.” In hindsight, I had no idea what that even meant. I come from a family that has no clue about financial management. Both of my parents stopped going to school in the third grade. They grew up in rural Mexico. This idea of higher education and financial management is oblivious to them. I didn’t have a lot of people around me to give me any advice. I didn’t know what I didn’t know. The first step was opening up a 401(k) and taking advantage of the 6% match.

That was the first thing I did. As I aged, I was like, “I have no control over that and I don’t want to be 65 until I could touch that money.” I started to get better at saving. The other thing that I learned from Mr. Money Mustache was index funds. He is very passionate around, “If you are going to be in the stock market, this is the way that you should do that,” which led me to another person. I’m not sure if you are familiar with, he has got a fantastic blog, which became a book called JLCollinsnh. That was my second step.

I was like, “I have learned from Mr. Money Mustache. I want to have way more oversight over the money that I do have and starts a stockpile some of it. How do I deploy it?” I found that blog and I logged into my 401(k) account work and started transitioning all that to index funds. I did the same thing in the stock market. That was the second evolution, which then over the years you start to realize, it’s amazing how many geopolitical things influenced the stock market like, “North Korea is upset at America. Amazon is down 10%.” I’m like, “I have no true control over this.”

Once I had been active in the stock market, I wanted to deploy it into something that I truly have more control over and I stumbled into BiggerPockets. Through BiggerPockets, I started learning all the different strategies that one can learn and then take action on. I started to learn about all things real estate and decided at that point that I want to start investing in single-family residential, specifically the BRRRR strategy. Thanks to what I had learned in BiggerPockets.

Before we jump into your whole real estate thing because what is great about your story is that you do a lot of BRRRR and you do flips, most of the newbie investors that I talk to love the idea of a BRRRR, but it is an advanced strategy. I’m like, “Don’t do a BRRRR right away.” They will be excited to learn about you doing BRRRRs, but then you said some important things. You have talked about JL Collins’ book, Simple Path to Wealth. I want to highlight that so people can find it because it is probably the clearest and easiest to read, and not a boring book on financial independence. That is a great one.

I wanted to highlight the story of your parents because that is what the American dream is. It is not that you are here and everybody can have the picket fence, but it is the story of immigrants coming to this country because everyone who is here is some form of an immigrant. They have that next generation that gets to do something bigger than they ever dreamed. It is so lovely that your parents come in here without any financial education, all of a sudden than next generation.

You are able to explode with all the information and create an amazing life for yourself. I’m feeling super inspired by that. The same is true for me. My mother is from Puerto Rico and she didn’t speak English until she was twenty. My father is a second-generation from Mexico. It is cool to see that this dream is alive and well. I wanted to highlight those things that you had said.

I have a mystery that needs to debunk. Is your last name McIntyre? That does not sound Spanish to me in the least bit.

Let me debunk it. My father, his mother was from Mexico. His father was from Scotland and so were immigrants in the US.

There is a little bit of Scottish in you somewhere.

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Financial Management: Start learning all the different real estate strategies that one can learn and then take action on.

 

Ernesto, I also have a question for you. Where are you now when you start investing in real estate and found BiggerPockets?

Back to Zeona’s point, the topic that the whole immigrant first generation thing is something very important happened that I don’t often include, but within the context of our conversation now. It was 2013 that, growing up, I always dreamt of wanting to help my mom buy a house. I didn’t know anything else. I didn’t know how to finance it. I didn’t know what was involved. She kept saying like, “It is my dream to have my own house.” We did. Her and I, in 2013, went half and half on the house. It was a proud moment for me because it was good to know that you helped your parents accomplish one of their dreams. Fast forward, that has become a tremendous benefit.

One of the classic mistakes that we made is we assumed you had to put a 20% down. We saved probably for a heck of a lot longer than we needed to. Together we came up with a 20% down payment and then we get my mom her house, which ironically has a white picket fence. Fast forward seven years later, there is so much equity in that house.

That is one of my favorite, easily accessible forms of financing to put down payments or partially fund my flips. What the hard money lenders don’t fund is the equity line of credit. By me doing something nice for my mom, did it set me back a little bit because of the cash that we sent into the down payment? A little bit, but I would like to think that I can now grow that money exponentially via HELOC. A little detail I want to throw in there.

Are you co-owners with that on your mom or did you punch for the down payment and she is nice enough to use HELOC on the house?

It is me on the title. Her income is so low. She would have never qualified for the mortgage. My mom, to this day, I will be frank, cleans hotel rooms for living, which is a big part of my why, which maybe we will get into. Those will be the background that I come from.

Is she still in Mexico?

She is in Monterey, California. We were getting to a point where it was like, “Mom, there is enough equity. We can get creative. Do you want to retire?” She is like, “No. I love coming home to my house every day. I love living a block from the ocean. I’m so happy here.” She wants no part of moving.

I do want to say that my mom was the house cleaner, too. I used to go with her because sometimes they could not afford daycare. I would go with my mom and I would hang out in the house or watch a movie or something and she would clean. It’s so amazing that I get to hire these moms because I have a whole Airbnb business. You might not know that about me, but I employ a lot of cleaners and a lot of them have their kiddos and I said, “Bring them.” It is so lovely to have that one generation later that I can hire five different moms, keep food on the table, and have their kids there. It is amazing what you can do one generation later.

You bought this house for your mom. You have got this HELOC available. In 2015, you start learning about BiggerPockets. When is your first true investment?

I probably stumbled with BiggerPockets in late-2016, early-2017. I inhaled it for about a year. I had a job that caused me to drive a lot. I was in my car commuting for altogether three hours a day. I remember playing the podcast back. This is before David Green. It was Josh Dworkin, Brandon and I would play the podcast at two times of speed because I couldn’t get enough. I got probably hundreds of podcasts over the course of that first year and some pivotal books. I had never read that much in my life. I never cared to read leisurely until BiggerPockets.

Until at the end of the show, people always recommend a book, I would jot them down and I would go through as many as I could. Early 2017-ish that I stumbled with BiggerPockets. The first intentional investment purchase that I made was long-distance, partly because of David’s book. It was in Indianapolis because the barrier to entry was so low and compared to the Bay Area, it was super low risk. Even if something were to go wrong, it was not going to crush me. I fell in love with the idea of investing long-distance.

I love that you are in one of the most expensive markets in the country, Oakland, California, Bay Area. You did not let that stop you from investing. First, after you brought your mama a house in Monterey, which if you guys don’t know Monterey, it is a beautiful part of California right on the water and you didn’t let this stop you. Now you are in Indianapolis. How much money did you need to invest in Indianapolis? How much did you say about that time?

That first purchase was a combination of the cash that I had re-saved after drawing my bank account at that time down to zero to fund that 20% down payment for mom’s house. Fast forward more than a couple of years later, I had then accumulated enough to do two properties at once. I got a little confident and acquired two BRRRRs at around the same time. Between my cash that I had stashed away and then taking a loan out of my 401(k), it was probably in the range of about $120,000 to fund both of the BRRRRs and that is for the purchase and the rehab altogether.

These are two properties you got in front of a $20,000 single-family homes. What did those look like?

They were both single-family homes, 3-bed, 1-bath, and cookie-cutter floor plans in Indianapolis.

What about these properties made you want to buy them?

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Even then, I was naive. I had suck what I had learned from the podcast and decided that the BRRRR strategy sounded attractive to me. I used David’s book as a model to ask certain questions and wrap my mind around the concept of a BRRRR because it’s not as simple as buying turnkey. There is a lot of other factors to consider, how much rehab, what we think the appraisal is going to be, etc. I had enough after having some conversations with the realtor that I had clicked with at that time, who I’m no longer in touch with, she suggested a couple of properties and I had enough for both. I decided to give it a try.

Sometimes when people go long-distance, they go with an agent who has an unofficial team. They are doing a “turnkey,” but did you have to go out then and find your own team and manage the whole BRRRR from afar?

I networked in the Bay Area. It is funny the very first meetup I ever went to and again, one of the things that I don’t think we discuss enough is how we change as people. When you start investing in real estate, it is not about what things have to be done. It is who you have to be and who you become the growth that you have. For me, stepping out of my comfort zone, I’m pretty social by nature, but I like my clicker friends and I was never one to go out to random meetups.

Once my first meetup with strangers, none of whom I knew, at that very first meetup, I was sitting at a table, and I had already done some research on my own to the best of my ability and decided that the market statistics of Indianapolis were interesting to me. I go to my very first meetup and I’m sitting at a table with a couple of guys, then we would make introductions and they are investing in Indianapolis. We exchanged information and they were a good starting point. They made some introductions.

Getting back to your question, though, in terms of forming a team, the first person that I worked with was a broker who claims to deliver on all the services, “I can help you acquire it. I have a rehab team and we are property managers,” and that ended up not working out so well. Luckily, we were able to cut ties before we got too deep with the rehab process and I had to go and find my own rehab person, mostly through the BiggerPockets forums, quite frankly. That is how the first ones came about.

What didn’t work about your first team? What do you think you could have done to prevent going with someone that was not very good?

It is not enough to interview people. In hindsight, a lot of the questions that a newbie would ask are almost like you are trying to figure out if you liked that person. You don’t know what you don’t know. You probably haven’t heard enough about what can go wrong. You are so impressionable, especially with your first couple of deals and you trust, unfortunately.

I have found that, too. Anytime that I have failed, I take them for their word. Ernesto, I think you are a man of your word. Zeona, I’m sure you are a woman of your word. I like to think I’m a man of my word, but not everyone is like that, especially when push comes to shove. You have to document as many things as you can and get people that are trusted and verified by others.

I will give you a specific example. With the BRRRR strategy, you are trying to hit certain ratios. You want your purchase plus your rehab, people say 75%, but I would say closer to 72% because of your closing costs on your mortgage when you refinance. If you can do that successfully, then your appraisal comes in and everything checks out, then you are going to, in theory, and recover all of your funds. However, if you are new and you don’t know how to dissect the rehab scope, for example, all you care about is the number. I know that I’m under contract on this property at $50,000. My contractor gave me a scope of work that says $22,000, but I’m super new and I don’t know if this makes sense or if I’m paying the market rate or not. I know that my numbers are going to work. This feels good. I’m going to go with it.

I love that you are okay moving forward without knowing the full picture. A lot of people probably stop at that point. I was at a conference, the guy Rob O’Neill who shot Osama bin Laden was there and he said one thing. He said, “Fear is okay, but panic will kill you.” Even though you had probably didn’t know that at that time, but it seems like you have embraced that fear. You are afraid, probably nervous, but you didn’t panic. You went through your systems and it seemed to have worked out for you. I love that.

Back to who you become as a result of real estate investing, I’m a much more accountable person because, in the end, everything is your fault. The contractor may have screwed you. This rehab may have gone wrong. You paid more than you thought you should have. Ultimately, that is going to make you better and it is your fault. If you continue to learn from your mistakes, hopefully, you combine that with learning from the mistakes of others, you will get there faster versus being so terrified or panicking when something does go wrong with your point.

You throw your hands up in the air or you do this on the coast, then your project goes terribly wrong and you are out $200,000 versus $15,000, which is not going to take you that long to make back. It gets you to realize that in the grand scheme of things, it is not a mistake that is going to kill you and going forward, you are going to become better because of it.

Every single real estate investor or investor that I have ever talked to has made mistakes in the tens of thousands of dollars, and they are still with it. If you are going to get on this journey, expect to make mistakes and that tens of thousands of dollars range. It is okay. It is part of the process and don’t let it happen again.

Let’s go into the deal numbers. We are way into this show and we have not talked to any numbers. I can’t believe Craig is off falling over in his chair.

Ernesto, give us some of your numbers.

That first deal, my purchase was $37,500. It was the price of the home itself. My rehab came back at $16,000, so that puts me at $53,500. It was about $1,100 in closing cost. That puts me at about $55,000 coincidentally. My appraisal came back at $73,500 when I got the bank loan. I did get much of my money back, not all with closing costs. I left about $6,000 in the deal to make the numbers nice and round for everybody. Now I’m renting it for $8,750. I’m on my second tenant there. My first tenant was $7,050, but the market has picked up that neighborhood is improving on that specific deal. Those numbers in Indianapolis are getting a little bit harder to find as the market has increased. For me, those are numbers that I’m super happy with.

Those are crazy low numbers for most people reading, especially if you are in a big city. Ernesto, correct me if I’m wrong, but BRRRRs worked a lot better in those markets where they are cheaper because in order to refinance 20% out. In $70,000, that is only $14,000 you have to add or you bought it for $50,000 and you only have to add $10,000 of value. Whereas, if you are in Denver, the property is $400,000. Now you have to add $80,000 of value, which is a lot harder to do.

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Financial Management: When you start investing in real estate, it’s not just about what things have to be done, it’s who you have to be and who you become, just the growth that you have.

 

I get people all the time coming to me in Denver and Z, I wonder if you do too up in Boulder. I’m like, “You are not BRRRRing here. Either there are too many big dogs. It is too expensive. It is too much rehab. Honestly, even after due to rehab, you are not going to get your money back.” I want to tell everybody that BRRRRing is made best in markets like Indianapolis and in those cheaper places. Tell me if I’m wrong.

Mr. BRRRR himself, David Green, put out an article, he said, “This is why I’m not BRRRRing.” He goes into detail why, not partly because of the cycle of the market that we were in the cost of properties, it is too high to make it work in most cases and all the coasts where the rental numbers don’t support the loan after you refinance out. You are not even going to come close. I agree. It is much harder to do in higher-priced markets.

You mentioned that you didn’t pull all of your money out. You left $6,000 into the deal. Were you happy? Were you sad? What happened? How did you feel?

I was not upset. I sat down and calculated my cash-on-cash returns. From what I remember, I was still in about the 50% cash-on-cash, which the way I look at it, I was able to acquire a property, rehab it and cashflow close to $200 a month on that, by leaving $6,000 in the deal. Had I gone through the traditional purchase price or the traditional investment loan process, I’m looking at 20% to 25% in a down payment. After a few of those, I need to take a break from investing and save more money.

Beyond that, you go through the process of doing the cash and refinance, learning a lot about the details of rehab. This is another point that David has made in the past. Being a BRRRR investor makes you good at different areas of real estate investing. If you can BRRRR, you get familiar with the rehab process and managing rehabs, then that translates pretty closely to doing flips as well, which coincidentally is where I’m focusing on.

I’m curious if anything went wrong for you because when you were laying out the numbers, I was waiting for you to say like, “It didn’t work.” I’m amazed. I want to be like, “Congratulations. How the heck?” What went wrong along the way?

I have since done many other deals and things have gone wrong. That is where a lot of people now know me from. There is a community on Facebook called Indianapolis Out Of State Investors. Part of what people enjoy about that community is it is very organized. We don’t allow for spammy posts and a bunch of self-promotion, but we were pretty authentic about things that can go wrong. People need to be mindful of things that can go wrong.

For me, one of the biggest mistakes that I have ever made that I highly recommend nobody ever does is I bought my first two properties without a property inspection, which is crazy risky. I got a little excited. It was not made to be a super important point. Anything that I had ever read or listened to. On a future deal, I ended up having to spend about $9,000 in foundation work because I had never gotten the property inspected.

In the Midwest, another thing that is common. Now more people know about it, partly because we discuss it out in the open more often. On the West Coast, they call it a sewer lateral. In the Midwest, in Indianapolis, they call it a sewer scope. It is the process of getting not the property inspected but getting the sewer line that goes out to the city sewer. A lot of the older properties that were built in 1920s, 1940s and 1950s were made out of clay back then. Those can collapse and they are extremely expensive to repair. They range anywhere depending on the damage $5,000 to $20,000, I have heard.

Based of me learning from other people that that can go wrong, I now build that into my process and in one property that I was under contract on. I made sure to get that sewer scope done and realized that it was damaged, so the numbers didn’t work. I had to back out. Things can go wrong. They have gone wrong for me. Both of those inspections are critical when you’re doing your due diligence.

Skipping an inspection is tripping over dollars to pick up pennies. You got to do this upfront diligence because that saves you tens of thousands of dollars. I have got my third house hack. I knew about sewer scopes and I forgot. I forgot to do a sewer scope. I was at closing. I was like, “I would have to do the sewer scope.” People are living there, so I assume it’s okay. I found out this is years later since I purchased that one, that there is a massive belly in my sewer line underneath my basement. In order to fix it, I need to jackhammer the concrete, take out the old pipe, put in some new pipes, and then lay the floor and all that and restore it all.

I asked my contractor how much it was going to cost $27,000. I could have saved probably $27,000 on this disgusting thing if I had remembered to do a sewer scope. It is fine. That property has made me a lot of money already. That is the other thing. The property has probably made me $50,000. Throwing $27,000 back is suck, but at least I know it will be good forever.

Do you have to do it because sometimes they do this thing where they send high-pressure water through once a year and it is good enough? I’m all about not fixing the shed if it can hold off.

I can get that done every three months. They said it is pretty severe. The reason why it is so bad is because what happens is when the upstairs washer-dryer drains, there is a kitchen downstairs. The sink fills up in the intense to overflow because the drain can’t catch it. It is then the kitchen floods over. It is a pain in the butt.

If you lost $2,000 in a deal, that is a huge thing. Don’t skip out on your inspections. What did you do with the extra money? Did you reinvest it into the next one?

I have essentially been reinvesting it back in different projects in Indianapolis ever since. I have had other unfortunate things happen where two property managers make off of my money. I have had an unfortunate contractor situation as well, where a contractor didn’t make off of my money but didn’t finish the job. Now I have somebody else there to finish. All these things can go wrong. To your point, real estate can be very forgiving. Bottom line, it has not been so bad that it sets me back for a very long time or has that all led me to believe that I should not be doing real estate.

If anything, you learned to prepare better and base off that sewer scope example that is now built into a checklist that I have. Every time I’m doing due diligence on a new process, I load that checklist and that is on there and I don’t ever skip that. Back to Zeona’s point, it gets expensive, but it is the cost of doing business. A full home inspection is about $350, to sewer scope inspection is about another $200. You are out close to $600 to decide, “Should I buy this property or not?” You typically have to go through a handful of it before you find one that works. It is expensive. It is not fun, but it will save you tens of thousands of dollars. You got to do it.

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I wonder about your contractors. Do you send your contractors the inspection report and say, “What would it cost to fix everything on the inspection report?” Are they willing to do that?

Part of how I have evolved and will continue to evolve, a recent flip what I did that is exactly what I did. I set up a Zoom call. We had the photos and the inspection report. It was my contractor and my realtor and I’m like, “Let’s game plan. What should we do here? What should we not do here?” That was super helpful because there is no assuming we were getting crystal clear together. We are acting as a team and we were able to make some decisions that saved us some money. For one, the cabinets were very salvageable. We initially thought that they were not.

My realtor showed me a comparable listing that he had listed and showed me, “Looking this, I think this is how we can make them look.” We did that and they came out great. The other thing we learned is that all the comparables, some of them had no appliances. Some of them had used appliances. They clearly were not brand new. Rather than me buying a package of brand new appliances, we decided that the market was telling us we didn’t have to do that. The inspection port is super helpful.

You have got a savvy realtor because it sounds like he knew to look at the comps on the street and not overdress the house. If you are putting quartz countertops and shaker cabinets and all that stuff and in a C neighborhood, that something doesn’t match. You are overbuilding. That is a common mistake.

The spirit of sharing. Best practices again, how I continue to evolve as a result of mistakes that have happened to me. We underutilized home inspectors. If you think about a hard money lender, a lot of them is standard practice for them to reimburse you for the rehab. They are not fronting the money. You have to come up with it. Once you confirm that the repairs have been completed, then they pay you out for that, so you can continue to fund the rehab that way.

One of the things that they do is send out an inspector. They are not doing a full home inspection, but they are confirming, “Yes. This amount of work has been completed. It is up to code.” That is something that I learned from one of my best friends and have been in this business, Dan Perez, who will probably read this.

He is a razor, sharp and smart investor. He and his wife have scaled up to 70 units in two years in Indianapolis, but that is what they do. Their inspector is frequently on their rehabs. They had to pay the inspector by the hour and they had very little to no surprises to make sure that work was being done on time. It is being done well and everything is up to code.

I don’t think I have ever heard anyone rehire their inspector to go inspect the contractor’s work. It seems so obvious, but I have never had anyone say that before.

I had this conversation with a different inspector in Indianapolis. I said, “What do you bill per hour? If I don’t have a full home inspection for you, what do you bill per hour?” He said $75 to $100 an hour.” Cool. If I have a month-long rehab and I pay you to go out there two times and give me walkthrough photos, videos, everything is up to code, some of the best money you can spend.

I am 100% doing that from now on. That is a great tip. Let’s move on a little bit from this. You have got these two properties from that first BRRRR, something you did in Indianapolis. How much passive income did you get from that? What year did you finish that project, refinance it, and all that?

That was altogether a six-month process. These are Midwest properties, cheaper properties. Am I richer getting close? No, I net from each of those properties combined due to rent raises a $525 combined, which isn’t life-changing, but I think the practice that you get and going in the right direction is super helpful. Since then, I have decided that based on where I am in my life, based off what I have learned, the resources that I have, and being able to redeploy those proceeds and not chunking down 20% and 25% per acquisition, I’m focusing on flips.

I have three different flips at different phases. One was in escrow, the other one is getting listed this week and the other we were under contract on, we should be closing soon. I have decided that based off what I have learned. Again, one of the big advantages of the BRRRR is that I’m not thinking down so much capital that in the short-term, I’m going to shift the flips and stuff for myself.

About flips, do you think that the ball is going to drop at some point here where everybody is so hungry and there is no inventory? People are buying up a storm, but at some point, when too many people are doing the same thing, it starts to set off warning bells in my head. It is like Bitcoin or game stop and all that stuff. You expect the bottom to drop out at some point. I’m a big believer in homes. I will always buy them, but flips, you can get stuck with a flip. I’m curious what you think about that.

There are different ways to mitigate your risk. One of which I specifically hang out in the median ARV ballpark. I know that the median ARV for a property in Indianapolis is about depending on the US $220,000 to $250,000. If I’m doing a high-end flip that is going to resell for $500,000, there are not as many people in that city that I have a buyers’ pool for. There is a specific example that I can give you. There is a pocket of Indianapolis called Bates-Hendricks. I have had two different conversations with realtors that I know.

They have given me the skinny, that pocket got oversaturated with developers and people that were getting overzealous with flips in Indianapolis as a city is still a seller’s market, but that pocket, you have inventory that is sitting there for a while. If you are going far above the median price point, you are going to flat out and have less people that are even going to be able to afford it. Secondly, the amount of work that goes into it, you should be factoring that into your returns.

What I mean by that is am I willing to take a 20% return on something that requires me to go down to the stuff and I’m doing a full gut and it is 4 to 5 months of rehab process alone versus looking for similar returns on something that I’m in and out of in a matter of weeks. I did one wherefrom close-to-close from the acquisition closed to closing on escrow, and it was a 50-day process. Did I make a ton of money? My gross returns on that after everything was $19,000. Was it a ton of money? No, but it was super quick. The answer is that everyone is least the favorite answer is it depends.

I have got another question for you, part one, part B. I was talking to Jay Scott one time. I was grabbing coffee with him one time. He is a massive house flipper in Atlanta and all that stuff. He said, “I regret every house I have ever sold. A lot of the investors he talks to say the same thing.” I wonder, do you think you are going to regret not keeping some of these houses? Do you keep every third one? Do you have any strategy there or are you using the flipping as your money maker?

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Financial Management: If you just continue to learn from your mistakes, hopefully you combine that with learning from the mistakes of others, you will get there faster versus just being so terrified or panicking when something does go wrong with your point.

 

For me, I left my W-2 and I wanted to continue to build seed capital for myself. That is why I’m focusing on flipping apart from where we are in this market cycle. Long-term and there are so many benefits. Jay Scott probably could have retired by now, but this is the beauty of the real estate. An important decision that people have to make is where are you in your life? What are your goals? How much capital do you have? How do you want to deploy it?

Based off that, you can make a better decision about what is right for you. Even people that want to flip, people like to do different types of flips. Some people like to do new builds only. Some people are doing like, “I’m going to take this duplex. I’m going to go to the planning commission and have it create two condos or townhouses. I can now list those separately.” For Jay Scott, in hindsight, it was 2020, but I’m willing to bet in the beginning, he needed flips to get going and then reinvest in his business.

It is the butterfly effect. One little thing changes and your whole life changes. It sounds like your story is pretty inspiring. You started off with the whole Mr. Money Mustache, financial independence, and no more working at W-2. You have probably gone down the index fund path. You realized that that was not quick enough for you. It is still going to take you 10 or 15 years of slave labor at Verizon to get there.

You still don’t want BiggerPockets on those. You can do it much quicker. You could not invest in Oakland. You did not stop there. You went over to Indianapolis, bought your first BRRRR, and kept those into your portfolio. That works so well. You started building out your context to building out your reputation. You have now done full-time flips out in Indianapolis. Is that a good summary of your story?

The fact that I have so much confidence in the network and resources and what I have learned that I know that I’m going to be able to, at a worst-case scenario, replace my W-2 income gives me the freedom to then go and do things that in the past, I might have been scared to do. My goal in 2021 in Indianapolis is to do at least ten flips. We have three constantly looking at more deals. I’m confident that I’m going to be able to get there.

How do you achieve financial freedom or time freedom? That is up to you. I see this question posted on social media more often, “Would you rather have $1 million net worth or would you rather have $10,000 a month that you can consistently generate with not a ton of time effort on your part? Everybody is going to have a different response. That is a different way of looking at outcomes that people are looking for.

What is your response?

Again, for where I am in my life. I would take the $10,000 a month. That is not super time-intensive any day of the week.

I’m thinking of $1 million. If it is going to be a 4% return on your investment, you will put in the market or whatever, the 4% rule is $40,000 a year, which is less than $4,000 a month. It seems like $10,000 is an obvious answer.

Conversations with people that are like, “How am I going to come up with $20,000 a year to put my kid through this private high school?” I don’t think it is crazy hard once you learn and you know better. If more people understood the fundamentals of real estate and what strategy does work in their local area, for example, in the Bay Area and in Oakland specifically, an overlooked strategy that works. We analyze deals all day as house hacking, renting by the room, or there is plenty of small multifamily. It is whether people are willing to make that short-term sacrifice or not.

I was talking to a dude in the Bay Area. He was in the East Bay as well, Oakland area. What he was doing was super interesting. He bought a massive lot. It was a 17,000 square foot lot. There is some rule in Oakland where you can, I don’t know the square footage to building ratio or whatever, but he was able to add three ADUs on this one lot. He makes a fourplex with detached ADUs on one lot. It is a huge value add. It is going to cashflow a whole ton. Have you seen that at all in your area?

I don’t know the ins and outs of this, but I know the State of California, as of January of 2019, got relaxed on what people can do in terms of ADU. I know the State of California was so frustrated with the not in my backyard people in certain counties and cities are pushing back on development that in the State of California, there is a very minimal restriction to converting garages, basements, and building the ADU. A new ground-up construction ADU is probably not going to be your cheapest option, but it is nice to know that from zoning and a regulation standpoint, there is very little that is holding you back.

If you are willing to get creative, there is a guy on our team here in our office who took a 1,700 square foot house with a detached two-car garage, and without having touched the garage, he is reconfigured the floor plan to do three separate living areas. He is doing rent by the room and I need to check in with him on what his numbers are going to be. I know, at minimum, he is going to be living for free. This is a property that is in a great location in the Bay Area that long-term is going to be fantastic for him.

My question for you is, what are you building your mom an ADU? Is that happening?

One of the ideas that I have posted because for a lot is about 5,000 square feet. It is a good size lot. We can put up a fence so that she still has her own private backyard. We will put up the ADU. She is not yet into it because my brother lives with her and rents out one of her rooms. It is a possibility. Again, going back to the amount of equity that we have and HELOC, worst-case scenario, that is how we can finance it. We pay it off and probably 5 or 6 years, depending on the amount that you collect on it. She can hang it up, whatever she wants when she is decided. I don’t want to do that yet, but it is nice to know that she has the flexibility.

I have got another question for you. You don’t have a W-2 anymore. That income is not necessarily guaranteed. Have you run into any snags or troubles trying to secure lending, especially on the refinances with that?

Since I’m currently not doing rentals, refinancing is not a concern to me. There are more lenders out there that are doing asset-based loans. The interest rates are not as favorable, but you can still obtain them. They don’t do the conforming ten-property limit and there are more lenders that are doing those things. Given the reserves that I have to fund my flipping business along with some private money partners that I have, funding projects in the short term is not a big concern for me.

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Giving us a high-level view, how many deals have you done and own? Do you own those two and your mom’s place?

If you take my rentals and the flips that I have done, I’m at nine. I still very much consider myself a rookie.

It is good that you stay humble like that too. I know a lot of people who have done two deals and think they are experts.

Everyone is a coach on social media.

We should head out into the final part of our show, which is the final four. Z, you want to kick us off?

Our first question for you is, what are you reading? It sounds like you are a big reader.

I am and I used to not be, but BiggerPockets and real estate, in general, sparked my interest in reading all over again. I’m re-reading a book that I enjoyed. It is called Building a StoryBrand by Donald Miller.

I am so drinking that Kool-Aid. I got Craig can do it.

I hired someone from that. You were coming, Z. Everything is you.

I see Craig do some of that on his social media that does not surprise me.

He put out the third book, but I have a second book here, Marketing Made Simple. I was working on my website and I was looking through it, being like, “He is so good.”

It is a manual for how to build your website and what it should have.

I have heard a lot of good things, especially from Z. Ernesto, what is the best piece of advice you have ever received?

The best piece of advice I ever received from another book that I recommend is called The Four Agreements and one of the four agreements is, do not assume. It is amazing. At least once a day, there is some final tidbit of information or a conversation that could have ended a different way because one person or maybe both assumed. When we take one more step to get one more little bit of clarity, it changes everything.

I love that book. It is one of my favorite books I have ever read.

What is your why?

My why is that I don’t have a W-2 and I have more time freedom. I can surely do the things that I want to do and are worth doing. I want to start putting out some content and play a more active role in helping. Maybe this is not a good way to describe it, but not the lower class because they are not lower class, but how do we get people from the bottom of the economic tier in America into the middle? There are a lot of resources and conferences, people that we celebrate that represent massive abundance.

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Financial Management: Be strong enough that even if something were to go wrong, it wasn’t going to crush you.

 

I know everybody wants $10,000 in passive a month, but what would it do for a typical American to figure out how to get to $1,500 a month? It gives them an amount of security that then gives them permission to take a little bit more risks. I feel like that type of stuff is lacking. Figuring out ways that I can participate in that conversation in that community to start helping people realize that it is doable, maybe at a smaller but equally impactful scale.

I love that about real estate is I feel it evens the playing field. It seems like you need a lot to get into it, but if you are scrappy and you make good relationships, anybody can get into it. I love taking those underdogs that especially younger people that are excited that will follow through and are true to their word. It doesn’t take a lot to be good at it. I agree with what you are saying.

I would say the second thing is me being a Spanish speaker. There is not a lot out there in terms of the bilingual conference. Some of the stuff that I have been recording and getting a blog going soon and making sure that we have things for people in the Spanish community to get the game as well is another priority of mine.

What are some fun and interesting alternatives to war that countries could settle their differences with?

It looks like a card against humanity card. Pillow fight it out.

You take your king and we will take our president and imagine Joe Biden versus Putin and then a pillow fight. Where could people find out more about you?

I’m probably most active on Instagram. It is Ernesto Hernandez. My handle is @BayAreaHomesByNest. That is representative of my gentle nature. I like to think stuff ever seen in public. “Hi, I’m Ernesto.” That is where I’m probably most accessible.

That sounds like a late-night DJ.

Thank you so much for coming on the show. Next time, we will have to have the bottle of tequila with us. I have told my girlfriend all about you because she loves tequila. I was like, “You got to go see Ernesto’s place because he has got more tequila than I have ever seen in my life.”

Aside from the drinking aspect of it, it is the most misunderstood and underrated spirit. People drink it and they have no idea what they are putting in their bodies that they see the process and understand beginning to end how tequila is made. It would blow everybody’s socks off. It is the fastest-growing category in spirits. I love it. I love tequila country and being in the distilleries and in the fields clearly this about me. It is my thing.

It is your first passion. Maybe you are doing real estate to buy your tequila. Thanks again so much for coming on the show.

My pleasure.

We will be in touch about maybe catching up offline too.

I would love that.

That was Ernesto, my friends. Z, what did you think about Ernesto?

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It is an inspiring story. I love hearing those low numbers. It is mind-blowing that you can buy a house for so cheap for $37,000 and it would be a livable place. I love that he took a swerve after doing some BRRRRs to learn about flipping and realize that that is going to get him to his next goals. All around, it was great. The thing that I didn’t ask him and I want to is, does he still want that Mercedes? I want a fancy car. I need to buy a house that pays for the fancy car. That is going to be the Mercedes, house, and the $500 a month is for the Mercedes.

You are going to buy a house to pay for your luxury item. That is amazing to do. Once you have hit base financial independence and you have got your expenses covered, buy a house to cover your stuff. One thing I love about Ernesto, and it tells you the type of guy that he is, is that he put his mom and his family first. I wish I had the courage to do that. He bought his mom a place before he even bought his own place. His mom, I’m sure, was doing fine in Mexico. I doubt she was doing that poorly. Otherwise, he would have probably been in Mexico with her. The fact that he did that for her and bought her a nice place in Monterey, California. That is a true testament to who he is. That is one of the reasons why I love that dude so much.

He has got a lot of heart. I wonder what that down payment was. It was probably pretty hefty.

I can only imagine. Amazing episode, everyone. It is super helpful if you guys can leave us a rating, comment, or review on iTunes or wherever you can. It allows us to get feedback. It allows us to make the show better. Please do share with your friends, anyone who is looking to get on that path towards financial independence. We are always happy to help and happy to chat. Z, you got anything else for us before we head out?

No. Thanks so much for reading.

 

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About Ernesto Hernandez

Ernesto HernandezErnesto is based in Walnut Creek, Ca and although he is a native of the Bay Area, he has been investing primarily in the Indianapolis market for almost 3 years. Starting with a Buy and Hold in the MontereyPeninsula of California, Ernesto has now done a mix of BRRRR’s and mostly fix and flips from afar.

Ernesto has helped build a thriving community of investors in Indianapolis and in particular, gets great joy from helping anyone young and hold take their first steps towards real estate investing and spends the majority of his time coaching people in that niche.