Table of Contents - Real Estate Side Hustle with Bigger Pockets CEO Scott Trench
Dave Debeau [00:00:08] Hey, everyone, this is Dave Debeau with another episode of the Property Profits Real Estate podcast today. It's a real treat. I've got Scott Tregg on the call with me and Scott is calling in from beautiful Denver, Colorado. How are you doing today, Scott?
Scott Trench [00:00:24] I'm doing great. Thanks for the opportunity to be here.
Dave Debeau [00:00:27] My pleasure. So, Scott, French is a very, very sharp young gentleman. He is a real estate entrepreneur. He's a realtor, is the CEO of Bigger Pockets, which is a monster in online training for real estate investors, I think definitely has to be the biggest source for online education, about real estate investing out there, as far as I know. And he's an active real estate investor himself. So, Scott, very, very pleased to have you on the call today here. And and when we asked you what what you would suggest as a title for our conversation, you put down our investing for financial freedom as a side business or a hobby. Now, that's very, very interesting. So tell me a little bit about your philosophy when it comes to investing in real estate and why you kind of look at it as a good option for people to be doing as a side gig or as kind of a hobby instead of a full time thing.
Scott Trench [00:01:29] Sure. So I think that a lot of the conversation online and in on bigger pockets, for example, and all that kind of stuff tends to be dominated by folks who are very passionate about real estate investing as a business. And I believe that there's a silent majority of landlords and the vast majority of landlords who own rental property passively as one component of their overall wealth building strategy. So I love and be friends with many different investors who are, hey, this is my business. This is full time. I am or I'm aggressively pursuing real estate with the intention to make it my full time thing. But I think it's also a very viable approach for someone like me who's got a full time job that's not real estate investing and still intends to deliver significant returns in excess of alternatives like stocks or other different asset classes through privately held real estate that I own and control. And I think that there's a lot of ways to do that that are not discussed as maybe as as much by the community.
Dave Debeau [00:02:31] Yeah, I think you're right. I think sometimes you put up the full time real estate investor on a pedestal as that's the goal that everybody should be aspiring to. And that's not necessarily the case. I mean, a lot of people love their jobs. And why would you leave that? However, I think you and I are definitely on the same page where we both agree that real estate is probably the best choice for everyday people to create significant wealth, cash flow, eventually the lifestyle they're looking for in a way that most people just can't do otherwise. So I think we're definitely on the same page there. Now, you've written a book called Set for Life. Can you tell us a little bit about that? How did that book come around and and how did you develop this passion for what you call yourself, a personal finance nerd? So how did you how did you become a personal finance?
Scott Trench [00:03:20] Yes. You know, the goal was going back to the beginning. I started my first job at a Fortune 500 company, and it was rated at the time the worst place to work for in America. So it wasn't that bad. But I did feel that my opportunity to advance quickly was not there. It just wasn't a reality for me to double my income or rapidly rise through the ranks or realize some of the great ambitions that I had at the time. And so I became a very interesting concept of financial freedom generally. And there were two schools of thought that really kind of hold my philosophy on achieving financial independence or financial freedom. One was this Mr. Money Mustache blog, a guy with a funny name who talks about saving as much money as possible through significant lifestyle cutbacks and choices in those kinds of things and how to be happy while doing that. And the other thing I saw was real estate returns could generate significantly higher returns than other asset classes. So my approach is kind of like, hey, I'm going to pack lunch every day and really be frugal so I can accumulate enough money to make a real estate investment as rapidly as possible after graduating college. And so that's really been a passion of mine over the last few years is how do I help folks that are very ambitious, that are maybe just starting out in their careers and are looking to aggressively move toward financial freedom and put themselves in position to make a real estate investment purchase. And to that end. My approach was, hey, I'm going to save up as much money as possible and then do this, make this first investment called a house hack. I don't know if your listeners are familiar with that term.
Dave Debeau [00:04:52] No, we aren't. So we'll jump into that after you after you finish telling your story. But I'd definitely love to get some.
Scott Trench [00:04:59] Yes, so, you know, in that first job, I was making forty eight thousand dollars a year and I saved about twenty thousand dollars on that income. Now, that was also with some moonlighting. So I would drive Uber and Twitter and stuff after work to supplement that. But I used twelve thousand dollars of that income of that of that savings to purchase a duplex in Denver. I was an owner occupant, so I put down five percent on this two hundred and forty thousand dollar duplex. I fixed up the other half. It wasn't like a major rehab, but it was a little bit of work, you know, stayed in cabinets, you know, fixing, you know, replacing the toilet, replacing the sinks, putting vanity's in those kind of things, but not moving walls or major plumbing or electrical overhauls like that. I put a tenant in the other side, got a roommate from my side. Both units were two bed, one bath. And that was my first real estate investment purchase, enabled me to live for free. I think I collected seventeen hundred dollars a month in rent on a one thousand five hundred and fifty dollar mortgage, including principal interest taxes, insurance and mortgage insurance. That came along with my five percent down payment. And I think that's a very powerful way for someone that doesn't have any assets and is just starting out in life and their career to get into this game of real estate investing with relatively low risk. Because, yes, I'm highly leveraged, but I'm also living in the property I am living. My risk is limited to to pay rent and have to fall dramatically or have to be really unable to place a tenant for a long period of time before I come out behind where I would be as a renter on a monthly cash flow basis.
Dave Debeau [00:06:32] Most definitely. No, that's that's very, very smart. So talk to me before we jump into White House hacking is because I was not familiar with that term until I was doing a little bit of research prior to our call. But tell us tell me a little bit about your real estate investing philosophy. What what are you focusing on? What market are you in? What strategy do you kind of tend to be drawn towards?
Scott Trench [00:06:55] OK, so so here I am. I'm the CEO of Bigger Pockets Dotcom. And I have to tell you something that, you know, people might disagree with to a certain extent. But you know what? I model it out and I look at it. I'm going to start with the stock market. When I look at the stock market and I think about an index fund investment over a very long time horizon, I think you're going to get about an eight to 10 percent long term compound, annual growth rate nominally right before or after inflation. So my real estate investment must beat that by a significant amount if I'm going to invest in real estate and put in the hours and hours of upfront education by listening to podcasts, reading books, meeting people, all that kind of stuff. And then, of course, the hours and hours of operation activity and acquiring and operating my portfolio. So I've got to get better than that and I've got to get significantly better than that. If I look at an unleveraged real estate investment without that any debt know the long term appreciation rates of property in the states are about three and a half percent. Right. That's the case. Shiller, long term home price inflation index are butchering the name of that of part of that. But Case Shiller is going to tell you, look it up. It's going to show you that the long term appreciation rates on properties that are already built, not new properties, new but new home prices are inflating at a higher rate than that. But for what's relevant to us as investors is the property price of the purchase of the structure. You've got the structure you've purchased. That's about three and a half percent now. Then you have to do your cash flow estimate. Right. And I think if you're buying if you look at a nationwide basis, you know, it's very difficult to get what the average cash flow of the real estate investment is going to be in any data form. So I'm guessing at this one, but let's call it a fifty. Let's say whether your rent is fifty percent of that's going to go to expenses unleveraged on average across the United States. So you get a thousand dollars a month in rent. You can get five hundred dollars in expenses. Right. OK, well, my estimation is that between that cash flow and the long term, appreciation rates are going to be looking at a seven or eight percent annual compound to compound annual growth rate, unleveraged real estate investment, which is unacceptable because it's less than the stock market right now. So how do I get more returns? I use leverage. So all that saying, I feel like this is an important component of my philosophy about real estate investing. And if I didn't go through this exercise, I wouldn't understand why I'm bothering with this concept of real estate investment. With the use of leverage, I can dramatically drive up my returns in an average year. So if I have a three and a half percent inflation in an average year over my real estate old period. Right. And I'm leveraged five to one, I'm going to get a seventeen and a half percent return on it, on just that appreciation rate, right on the mortgage. Plus, I'm getting some cash flow. My returns are really great in the first year or two or three of my hold period. And as I deleverage, I return on my return from a return on equity standpoint to that overall portfolio return of an unleveraged real estate investment. So I paid on the mortgage. I'm getting an all cash real estate return. So my philosophy around this is I'm going to buy consistent properties and I'm going to keep. I'm reasonably leveraged, but make sure that I have strong cash flow and a strong cash cushion to fall back on so that I can sustain meaningfully higher returns than about a 10 percent return that I think I could get the stock market over time. That means in practice, that I consistently buy and use moderate leverage on my portfolio.
Dave Debeau [00:10:16] So what would what would be, in your mind, moderate leverage? What are you shooting for? What kind of loan to value, for lack of a better term would you be looking at?
Scott Trench [00:10:26] Yeah, I mean, for me it's basically by every 12 to 18 months, putting it down about twenty, twenty to twenty five percent. Now in practice, I've had this act a few times. I've got a couple of duplexes which have significantly higher leverage. But also in practice, the Denver market has appreciated much faster than that three and a half percentage things. So my overall portfolio is probably leveraged at a 60 percent debt on my portfolio currently, which, you know, is is probably pretty good. But again, I'm fairly new to this. I'm still four or five years into my first real estate cycle as an investor, and I hope to be in this game for a very long period of time. So I'm going to continue to be very relatively conservative, have a strong cash position and buy well within my means as I go along this path.
Dave Debeau [00:11:10] Sounds good. So tell us a little bit about what house hacking is, because it's a fascinating concept.
Scott Trench [00:11:16] Absolutely. I think this is the most powerful way for perhaps young people or people that are interested in getting started in real estate to get going in this in this business. So, again, the massive advantage is it's basically just rent out a house. You buy a house or a duplex or triplex or complex. One of those residential properties that you could still get Fannie Mae 30 year fixed rate mortgages on and you move in and rent out the other units. And the reason this is so powerful is for a couple. There's a couple of reasons why this is a powerful one. You can use extraordinary amounts of leverage that are just not accessible to the ordinary investor that there's two things. One, it inflates your returns to very dramatically, and two, and allows you to get into the game much sooner than would otherwise be possible. So if you're a median income earner earning 50 to 60, 70 thousand dollars a year and you're trying to buy your first property, it could be 10 years before or three or three or four or five years at least, if you're saving five, ten thousand dollars a year. But you could be in a property in two years if you go through the house hacking approach. Now, I just talked about how that three and a half percent return is a 17 and a half percent return if you're using leverage ratio.
Dave Debeau [00:12:24] Right.
Scott Trench [00:12:25] You talk about playing down five percent in the property and you have an average year with inflation. You're looking at 100 percent returns right now. There's closing costs and all that kind of stuff. But that's a literal, I think, reality in an average market for a house hacker to get get that leverage.
Dave Debeau [00:12:40] So if I understand correctly, you're saying because again, slightly different terminology. Most of our listeners are up here in Canada. But the idea is, if you get into your own primary residence with five percent down, you get a residential mortgage on a property. And here in Canada, you can get anything up to a fourplex for the residential mortgage. Then you live in one of the units you rent out the others they the cash flow from that hopefully covers most, if not all of your your mortgage expenses. And you're basically living rent free. Is that what I'm understanding? And maybe even cash flowing.
Scott Trench [00:13:16] That's exactly right. Right. That's exactly. And that describes my first situation perfectly. And that is a tremendously powerful position for someone who is just starting out in this business to be in because you no longer have a housing expense. Your savings rate can dramatically accelerate if you make that purchase right. Even if you don't get it so that it pays the entire mortgage, even if it's paying most of the mortgage. And that's significantly less than it would cost you to live as a occupant of a single family home. I mean, this is a very powerful starter home property purchase that you can do if you do it once or twice. You may find that those two for first two purchases and over a three or four year span can generate enough cash flow to pay for a true single family residence that you and your family go on to occupied down the line. And then again, the risk component here is, is we talk about using lots of leverage. When you put down five percent and leverage 20 to one, that's a lot of leverage, right? People think, oh, that's very risky. But I'd argue that the homeowner is at much more risk than you. If so, people who are putting down five percent to buy a single family home, I don't know what the minimum down payments are to be. So if that's the minimum down payment, that person's in a lot more risk than a house than a house hacker. Funny term, I guess. I like the word house some years ago. So but if you put down that five percent as a homeowner, you're not getting any help from your tenants. So I think that there's I think that the this is a relatively low risk way to have opportunity, a huge upside compared with the alternatives and living.
Dave Debeau [00:14:49] Now, I wonder, have you have you talked with anybody or are you familiar with people who already perhaps own their own home and they want to. Try and figure out a way to house back what they already have.
Scott Trench [00:15:02] Yeah, yeah, I think that the short term rentals are becoming more popular these days. I think the
Dave Debeau [00:15:07] Airbnb type thing.
Scott Trench [00:15:08] Yeah. You know, you have a section of your house. You can Airbnb. It's a great way to offset some of that, some of the mortgage costs. That all depends on how far you want to go on this. Right. As a twenty three year old, I was going to go pretty far and buy a duplex in a up and coming neighborhood in Denver and fix it up. But if you're a little in a different position, you might want to maybe buy a nice complex that doesn't quite cover the cost of your mortgage, but allows you to live in luxury for significantly less cost than it would if you just bought a unit standalone. So same thing applies at every level. So if you have a house, you can build a carriage house above the garage or in the backyard or whatever and start getting rental income. There's a lot of ways to make this work and there's a whole spectrum of possibilities.
Dave Debeau [00:15:51] Definitely. Definitely awesome, Scott. Time flies when when we're doing a 17 minute interview. So as we're wrapping up, why don't you tell us a little bit about bigger pockets, what that's all about, how people can find out more about that. Also, you know, you've written this book Set for Life. I listen to an interview that you were doing about the book. It sounds fascinating. Sounds like you've got three different phases that you take people through. So, first of all, tell us a little bit about bigger pockets and then we'll wrap up and you can tell folks how to get a copy of your book as well.
Scott Trench [00:16:22] Sure. So bigger pockets. Dotcom is the world's largest investing resource for real estate investors. The folks that are looking to buy real estate that they privately owned and control and generate returns. So most of our users are in the US and Canada and are typically buying. I would say that the majority are buying those one to four unit properties. But there's also plenty of information about commercial small commercial real estate all the way up to hundreds of units in apartment complexes. So what are you interested in? You're going to get access to a variety of perspective from successful investors and be able to ask questions in our forums, listen to our podcast, watch videos, all that kind of stuff, read our books. We've got information on how to be successful and make better quality decisions with the goal of helping you buy a investment piece of real estate that you believe will advance your financial position in the best way possible.
Dave Debeau [00:17:14] Awesome. Sounds good, and people interested in finding out more about your book Set for Life.
Scott Trench [00:17:20] Yeah, so that we have a podcast on bigger pockets called The Bigger Pockets Money Podcast, where you can listen to me preach about personal finance and real estate. There's a lot of information about set for life there. And the book itself, like you mentioned, is a three pronged approach for someone who's starting out on the journey to financial independence from a position of little to no net worth and a median income. And if you can't tell, I have a personally aggressive approach to to driving towards financial freedom. So there's a specific audience that the book is for. But if you're interested in that, I think I've got a pretty high probability way to make some real progress towards putting together a position of liquidity where you can make significant investments that generate significant passive cash flow over time.
Dave Debeau [00:18:06] Awesome. That sounds good. Scott, thank you very much for your time. And your wisdom on today's podcast has been pretty short, but that means that perhaps we can have you back on again in the future. Maybe we'll talk about a different topic. That time, I really appreciate having you on. And thank you, everybody, for joining in this week.
Scott Trench [00:18:23] Sounds great. Thank you. Dave is a privilege and great to be here.
Dave Debeau [00:18:26] Thank you. Take care, everybody. Well, thanks very much for checking out the property profits podcast. And we like what we're doing here. Please head on over to iTunes, subscribe read us and leave us the review. Very, very much appreciated. And if you're looking to create a regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.