Chad Carson – Retire Early with Real Estate

Chad Carson - Retire Early with Real Estate

Chad Carson from CoachCarson.com joins me again on the Financial Independence Podcast to talk about the various strategies you can use to Retire Early with Real Estate!

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Highlights

  • The best real-estate strategies to use to reach financial independence and retire early
  • How real estate can be a good investment while also enhancing your lifestyle
  • What is the Mad Fientist’s Peak Arbitrage™ strategy and is it a good idea
  • Why you should buy utility but rent luxury
  • Thoughts on internet-based real estate investing companies (e.g. PeerStreet, RealityShares, etc.)
  • What you should look for when buying a long-term “Buy and Hold” rental

Show Links

Full Transcript

Mad Fientist: Hey, welcome everyone to the Financial Independence Podcast, the podcast where I get inside the brains of some of the best and brightest in personal finance to find out how they achieved financial independence.

On today’s show, I’m excited to welcome back Chad Carson from CoachCarson.com. Chad was on the show a few years ago to talk about real estate. And he has since released a book that’s compiled all of the various strategies that you can use to retire early with real estate. He shared an advanced copy with me. And I really enjoyed it. It’s actually got me super fired up about real estate again which I was sort of sad about at first, which I talk about in the episode, but now I’m actually really excited about.

I just wanted to get him on to talk about all these various strategies. And he did a lot of interviews in the book about people who actually used these strategies to retire early. So I wanted to dive into some of those stories. And I wanted to get his opinion on a strategy that I’ve been personally thinking about utilizing. It’s something that came up with myself. And I don’t know if it’s actually a thing or if it’s a good idea. So I wanted to get him on to talk about that as well.

Without further delay, Chad, thanks a lot for being here. I really appreciate it.

Chad Carson: Man, it’s awesome to be here. Thanks for having me.

Mad Fientist: So, the last time I spoke to you. You pretty much just landed in Ecuador to start a year in South America with your wife and two kids, right?

Chad Carson: That’s correct, yeah.

Mad Fientist: And now, where are you?

Chad Carson: So, we just go back a couple of months ago. The trip lasted about 17 months. And we had just an amazing time. We made it back to South Carolina (Clemson, South Carolina), a little college town where my home is. We had tenants in our home for two years. So we had to wait a little bit until they moved out.

But looking back over the whole experience, I still pinch myself that it worked out so well and we had such an amazing experience in so many different ways, just to be able to take off and put things on pause and leave. It was awesome.

Mad Fientist: That’s amazing. That’s great. And it was cool that I get to see you down there. We met up at the Chautaqua and had some Ecuadorian fun together which was nice.

Chad Carson: For sure… you didn’t have any guinea pig though, did you?

Mad Fientist: No, I didn’t. Did you?

Chad Carson: I did, yeah.

Mad Fientist: How was it?

Chad Carson: Well, it’s okay. It put the new understanding on baby back ribs when I was eating one of these things. Just picture I can barely fit this little rib in my hand. And you’re gnawing on it, like something from Dumb & Dumber.

But it was good. I mean I wouldn’t have it every day, but getting to try it out—every taxi driver we talked to in Ecuador is like, “Oh, yeah! Que bueno necesito probar.” They’re like, “You got to try this guinea pig. It’s amazing.” So we had to do it.

Mad Fientist: Yeah, I didn’t get to do that. But when we were walking around Otavalo or something, we got some fried bugs, lots of fried bugs. We had some of those. They weren’t too bad. They just tasted like fried anything really.

Chad Carson: Yeah, you put it down with some beer, it always works out.

Mad Fientist: Exactly. So that’s great. I’m so glad it went well. Did you say 17 months? That’s quite the time to be away and especially just somewhere in South America.
Chad Carson: Yeah, we were planning on 12 months. And the best part of early retirement and financial independence, some of the benefits, we were there, things were going well, and we said, “Yeah, let’s extend this trip. We don’t have any reason specifically to come back.”

One of the main reasons we went was we had all sorts of experiences that were positive. But our daughters were in local schools. They were really doing well and had friends. They were speaking Spanish fluently. They were correcting me. I’ve since been speaking Spanish not great, but I’ve been speaking it longer than they have. And my wife is fluent and teaches Spanish. They would come home, and we would speak Spanish around the dinner table. And they say, “Papa, [foreign language 03:44].” They’d wag their finger at me, correct me. They’re like, “Oh, my gosh! My little kids are correcting my Spanish. This is awesome!”

Mad Fientist: That’s amazing! So did you have tenants locked in for two years or was that something where they got to the one year and you’re like, “Hey, do you want to stay another year?”

Chad Carson: Yeah, they were there for two years. And they actually emailed me early before we came back and said, “Hey, we would really like to stay another year.” And we were so tempted just to keep going. We were sort of torn between coming back. We had family and grandparents wanting to know we were still alive and wanted to see their grandkids.

But I think it definitely ignited the itch to do this again. I don’t know when it’s going to be. We’re going to settle down for another year here. And they’re going to a local American elementary school this year. But there’s no doubt that experiencing the flexibility and the ability to travel and see new places and still have income coming in back at home, it made me realize this is possible. We’re already sort of thinking about what’s next. and

Mad Fientist: That’s very cool. And how did it go renting out your house? I know a lot of people are probably in the same situation as you were, and you’re thinking, “Oh, it’s going to be great to just go and take our family away for a year.” But a lot of people would probably worry about their houses getting trashed or something like that. How did renting out your primary residence go?

Chad Carson: Yeah. I mean it went really well. I had the benefit of being in the rental business. So I had a little bit of experience screening tenants. But we found a couple who had a young kid. He’s a professor at Clemson at the local university. And they had a little business they started the year before. So they were super busy, but they were awesome. They were early on their rent payment every month. They did improvements to the house. There was a few, little things. They weren’t as much yard people as we are. So we had a jungle in our backyard when we came home. But other than that, it was great.

I mean, home ownership, for a lot of people, is not their thing. Renting keeps you flexible. But I would encourage people who are homeowners who think that it’s an anchor and it’s going to hold you down. Being able to rent your home and have that flexibility is very doable. And it worked great for us and effective. It funded. We made a profit. We were probably like +$500 a month in our house. In Ecuador, that covered our grocery. Not only it sustained itself, but it enabled the trip even more.

Mad Fientist: That’s amazing. That’s really cool. And I’m definitely going to just talk to you more about using your primary residence and renting it out because I think that’s the only way that I’ll ever buy a house again, is if I buy it first with rental in mind. I want a decent investment. And it doesn’t actually tie us down because it could be rentable. So we’ll dive into that.

But before we do, I want to get into what the state of your real estate business is now. I think the last time we talked to you, you had something like 90 units and things were going great. But now, you just spent 17 months in South America. So how did that play out?

Chad Carson: Yeah, there was a couple of things. I mean we’re about the same level. We’re about to sell one property. And so we’re sort of whittling it down a little bit. But the number of units, we basically pressed pause on the growth. We didn’t try to grow. We didn’t try to do much. We just sort of kept steady while we were there.

But one of the big challenges, the thing that we worked on pretty hard before we left was having a lot of systems in place and having people on the ground who could help me. It worked before I left, but you never know until you just leave the country and say, “Alright!” I have people who are managing my properties. “You’re on your own. You can text me here and there. But I’m in another country.” And it worked really well—I think better than my expectations.

And so, I think it confirmed for me having—we had a couple of different structures, different systems for how people manage our properties. We had a third-party manager. There’s a company, a local company who manage part of them. And then, we had a person who’s worked with us for a long time. It started as a bookkeeper, and then she grew into an administrator and kind of helps us manage properties now. Between her and a handyman who’s really a good handyman, they handled 95% or more of day-to-day activity.

And then, every week, my routine while I was in Ecuador was she would upload the bills that we owed, that the contractor came out, or whatever. She would scan them in Evernote, so I could go look at what the bill was. And then, I would go online to the bill pay for my bank and just send them a check.

So, it could take me sometimes 20 to 30 minutes, sometimes an hour or an hour and a half depending on how much there was and how much bookkeeping I needed to do. But it allowed me to stay involved a little bit. I would do it for an hour, and then go take a Spanish lesson or go drink a beer and do something else.

Mad Fientist: That’s amazing. So, for people out there who already do have a real estate portfolio and were thinking about doing something similar, the key people in your mind to hire would be a general handyman, and then someone to do admin? Or have you used full service management companies in the past? And would you recommend them?

What would be your main focus knowing now what you know after being 17 months down to South America?

Chad Carson: Right! I would say, for most people out there, hiring a third-party management company who has a lot of those functions built in already is the best way to go. I’m a little bit of an exception because I started off building my own management business and we have enough units where it makes sense to have some of our own people working with us a lot.

So, I would say 99% of people, hire a management company yourself. They’re going to have a handyman. They’re going to have a plumber. They’re going to have an electrician. They’re going to take the maintenance calls in the middle of the night. You’ll never have to mess with any of that stuff. And you can just be sort of the person who’s managing the manager, getting financial reports, asking them questions. I think that’s the best way to go for most of us.

But there are other people who are a little bit more hands-on. And so you’d be more like what I have done. And in that case, one of the most important things in addition to having sort of a bookkeeper or somebody who’s going to help you collect rent and do some of those functions is having a list of good repair contractors. That’s the big deal.

If somebody has an issue on a Saturday, their toilet is leaking, and water’s going on the floor, you just want to be able to call and text that handyman, and then be able to go out to the house, take care of it, send you some pictures and have trust that they’re going to actually follow through and do it right.

Mad Fientist: So, you weren’t too busy managing your own 90 rentals, it sounds like. So you had time to write a book, which—big congratulations—you sent me an advanced copy. And I loved it! So it’s great. It’s Retire Early with Real Estate. It’s through Bigger Pockets. It’s fantastic.

So, yeah, how was that process?

Chad Carson: It was laborious. I can’t lie. The actual writing of it became tedious a little bit. But I love the topic. And I’m so passionate about retiring early and the financial independence community. And what I really wanted to do was sort of combine two communities that I’m a big part of.

The real estate investing, Bigger Pockets, how to use a few rental properties to build wealth and create income is something I’ve done for a long time obviously. And then I’m super passionate about a lot of the things you talk about in your podcast and a lot of the community of not knowing when you’ve hit enough money and enjoying your life and focusing on happiness. And doing what matters is sort of the theme of the whole book.

So, it was just fun combining those two ideas. The idea is that be a strategy guide, almost like you’re climbing a mountain and financial independence is at the top. But then, along the way, there’s a bunch of plateaus like what I’ve done with mini-retirements and semi-retirement. And I try to show how the main routes up the mountain using real estate, what they are, and how you do them.

I got to interview 24 other early retirees who use real estate. And I sort of showed their numbers and how much income they need to live off of and how they did it with real estate. So I learned a ton getting outside my own box and learning how other people have done it and try to teach it to other people as well.

Mad Fientist: No, it was fantastic. I loved the case studies. It was always like a treat at the end of the chapter to hear about somebody who had put a particular strategy into practice.

And yeah, your site is called CoachCarson.com. And it really felt like a playbook for using real estate to get to financial independence. Was that a conscious choice? It’s like all these different strategies, you give the pros and cons of each, and it really just felt like a playbook.

Chad Carson: Yeah, that’s funny you mentioned that. I had this old chalkboard in the house that I live in. Of all the features in the house, I didn’t look at the kitchen. I didn’t look at the bathroom. I was like, “There’s a chalkboard in the basement. Awesome!” For me, drawing plays on a chalkboard when I played football or somebody sitting beside me, and they’re drawing it up on the board and say, “Oh, this is how you could do it. You can buy that property. You can make sure all your expenses are covered, and then you have that much income,” that’s what I wanted it to feel like.

I really appreciate you saying that because I wanted it to be, “Okay, I’m a coach. I’m on your side. I’m that guy who cares about you, doing what matters in your life. Let me share some strategies that have worked really well for me and other people and hope they could help you.”

Mad Fientist: Yeah, no. It definitely came across like that. It was really enjoyable. It gave me a lot to think about.

And like I said, when I tweeted congratulations to you on Twitter, it made me want to potentially dive into real estate again. And I did have a negative attitude towards that in between, which you obviously picked up on and laughed at.

But it did! It got me really excited about it. I think I may be ready to dip my toes back in again after forgetting about the houses that I’ve bought in the past.

We’re a completely different scenario. Those were houses to live in. They weren’t investments. I wasn’t as smart back then. So yeah, all of my negativity towards real estate in the past is all of my own doing because they were my mistakes that I made.

So, you gave me a lot to think about. And I also recognize a lot of the people that you did case studies about which is exciting.

And one of the first ones I’d like to talk about actually is Liz from San Diego who we both met on Chautauqua. She’s been really big into something called PeerStreet which is, correct me if I’m wrong, it’s sort of like being a hard money lender on a grand scale. So rather than lending money to you, a real estate guy, who’s going to then do up a house and flip it, and then I would just collect interest from you, I think the way it works is I would just put in some money, and I could potentially be part of many deals.

The good thing about that is it’s sort of like lending club, and you’re lending money to people through the Internet and you’re collecting interest, except that it’s backed by real estate, and you’re the first lien holder.

Everything I said, is that correct?

Chad Carson: Exactly right, yeah. The cool thing about it, somebody with money and capital—

And that’s the disclaimer about some of these crowdfunding sites is what we’re talking about. You typically have to be an accredited investor. So you have to already be able to demonstrate that you have a million dollar net worth or you make $200,000 a year. I think those are the qualifications.

And so, for a lot of us, if you’re new in your real estate journey or new in your financial independence journey, it might be something that won’t be accessible to you right off the bat. That’s just the main point.

But as you grow and as you accumulate some capital, what Liz do just beautifully—she’s just the best example in my mind—she was a commercial lender in a regular job. That’s what she did every day, make loans to people.

And so the way that she explained it to me was “I already have the skill set, I like being the lender, I like being the person who funds the deal, and then let another entrepreneur go make the money, and they pay me interest.”

I should get used to that. It really is. I’ve done some lending now too. And I’m going to be doing more of that.

It’s a beautiful thing when you can just make interest and you have a secure investment. And for me, I like having real estate. So I don’t mind having my money secured by a piece of real estate.

And so, what she did with the crowdfunding platforms, the new innovation with them, is that it used to be “I have to have a hundred thousand bucks saved up,” and Brandon, if you wanted to go buy a property, I could then loan that money to you individually.

And that’s fine. If you can meet that person and I still think that’s a good viable strategy, but one of the issues with that is you have the risk of having one person, one property, you screw that up, you screw it up big time on one property, whereas some of these crowdfunding platforms, I think the best part about them is that I can take that same $100,000, and I could make potentially one hundred $1000 loans and basically pool up with other people.

So, I could have a hundred different properties. And so you get some of that diversification that we all know is important. I could even diversify over different states. I might say, “I want to have 25 loans in California, 25 loans on the East Coast, 25 loans in the south, 25 in the midwest.” You could sort of spread it out geographically which is really hard to do in real estate.

I think there are some challenges to those as well because they’re so new. They’re brand new. But I really am intrigued by the concept. And Liz demonstrates it beautifully that she put a big chunk of capital in PeerStreet, which is one of the better ones. And she had been living off interest at FI. Instead of her having to draw it down on some of her other capital and other accounts in more traditional accounts, she could just live off the interest and not touch any of the principal.

Mad Fientist: Yeah, no. It seems really interesting. And she’s a friend of both of ours now. And she was kind enough to share all her spreadsheets and all the analysis that went into it and how the returns had been coming in. It does look like a great way to go if you’re not wanting to go out there and try to find these individual lenders yourself.

So, obviously, you are a very active real estate investor, and you know you’ve built up your portfolio by working hard and hitting the ground and hitting the neighborhoods and things like that. Is that something you think you’d ever get into?

Chad Carson: Yeah, I’m already doing it. I’m sort of testing it out. I haven’t written about it on my blog yet because people listen to what I’m saying about real estate sometimes, and I just want to make sure I’m really doing it myself. And so I’m going to get ready to start writing some articles and share my experiences.

But so far, so good. I like the concept.

To me, the beautiful thing about lending your money—or not the beautiful thing, but the thing you should always keep in mind is that you want to make sure the collateral that you have is always the first thing you think about. In real estate, you either own the property or you own the loan, securing the property. And you can make money with either one. But the core of real estate always is that collateral, that piece of real estate.

And so, as long as you’re making loans, and you’re keeping that in mind—like one of the things I want to make sure, the discipline I want to make sure I do when I’m making loans is always stay below a certain loan-to-value.

Mad Fientist: And I believe it’s the max for PeerStreet. When I was just poking around, it looked like 75% was the max, was it?

Chad Carson: Correct. Yeah, I think that’s right. So you can make a choice though. It’s really cool. You can filter it out and say, “I don’t want to make any loans over a 65% loan-to-value. I don’t want to make any loans over 70%.” And you can sort. There’s a bunch of different criteria you can choose.

And so, playing around with those criteria, for all the analytical [folks] out there in our community, you could probably go back and look the success rates of past loans. And so I think that will be a key component over the next five to ten years in making sure—

Inevitably, we’re going to have another downturn, right? And so the security you have in a down real estate market is having some equity above and beyond the loan you made. That way, if you have to take a property back—which you will eventually, somebody is going to not pay you—you wouldn’t be panicked about that. You would say, “Alright, I’ve got some equity. I’m going to take it back, sell it,” and you want to take it back, PeerStreet or whoever the lender is, will take it back for you. But there will be some cost. You’ll have some margin to eat up those costs.

Mad Fientist: And being first lien holder, you would be first in line for getting the property. So you won’t be splitting that with anyone. If they stop paying their mortgage, then they default, and they foreclose, and then that property is owned by you, the investor?

Chad Carson: Correct. That’s the important part. First lien means you’re first in line. I would be very cautious about making second liens, second loans. I think there are some out there. But that’s a whole other ballgame.

Mad Fientist: That’s why lending clubs seems such a crazy idea to me, making loans to people that were secured by absolutely nothing. When I first heard of PeerStreet, I was like, “Oh…” I wasn’t too sure about them. And then, I heard that it was actually backed up by the actual property, and you would get it at the end of the day. That made me change my mind a little bit—which is good.

Chad Carson: Yeah. I’ll add one more thing about crowdfunding. I know that we’re kind of going down the rabbit hole. But I think it’s a cool rabbit hole. The innovation and the reason I said that we all have to be cautious about it—I’m not putting all my money in there. You want to still diversify—is because the technology and the legal contracts that attach your money to that property is something new. It hasn’t been tested a lot. And what I mean by that is when you own that $1000, you are basically buying a loan to PeerStreet or to an entity that PeerStreet controls and owns. And then, they are making a loan to the actual borrower.

And so, in their books and in their contracts and everything, it’s supposed to be connected. And more than likely, it is. But it’s just not tested. If one of these new companies went out of business, I’m not 100% convinced that in every case, the bankruptcy court, whatever happened if PeerStreet went out of business or whoever it was wouldn’t take the properties that you own, and they would be able to separate you from your loan.

I know it’s supposed to happen right, but I don’t know. It’s just new to me. And so I’m kind of pointing out the things that I’m cautious about and concerned about seeing. And I think we’ll know the next downturn when one of the technology companies goes out of business, we’ll see how that’s treated. But up until now, nobody really knows.

Mad Fientist: Oh, yeah, that’s great to point out. So thanks for that.

And just before we move on—because we’ve gone down some rabbit hole, but it is an interesting one—is PeerStreet a major player in this space? Or are there others that you’ve heard are bigger, better, more established?

Chad Carson: It’s one of the big ones. And I like the user interface with them. And they seem to be very transparent, which I like. So they’re one of the big ones I’m testing out. Realty shares is another one I’m testing out.

They’re a little bit different. They’re almost a different animal. They do some loans like Peer Street does. Peer street, 100%, I believe is just loans to borrowers and typically hard money loans like people flipping houses.

Realty shares is a little bit different where sometimes they do loans, but they’re more like commercial real estate. So you might be able to buy into a deal where you’re an equity partner in a big apartment complex. So that’s a little bit different. You could be the lender. You could be the owner.

The caution there, if you’re brand new to real estate, I think I’d be a little bit more nervous about that, going and having to analyze a real estate deal and know that you should be an equity partner on this deal. But for people who have a little bit more experience, it’s a really good way to get access to this big syndications and commercial real estate deals all over the country that you might not have access to otherwise.

In the past, it used to be like, “Oh, who do you know in this local town?” It was kind of an old man’s club who are able to control all of the deals. And whoever had money on Wall Street could kind of get into them. Whereas with Realty Shares—and there might be a couple of others that do that as well—they’re taking those deals and putting them out on a technology platform and allowing other people to get access to them at small, like $5000 or $10,000 increments.

Mad Fientist: Yeah, okay. That sounds interesting as well because, yeah, you may not have the capital to purchase a 40-unit apartment building, but a fraction of it may be a good return on investment.

Chad: Yeah.

Mad Fientist: No, it’s interesting. I’ll look forward to reading all your analysis on Coach Carson once you try all these things out because it’s exciting to…

Chad: It is.

Mad Fientist: It’s being democratized in a way. That was the first thing that sort of got me excited. I was like, “Ooh, maybe I could do that a little bit.” And then I got to the long-term buy-and-hold which has always been something that I thought would be really interesting to do. And I would love to have just a very small portfolio of buy-and-hold real estate, particularly in my home town in Pittsburgh because it just seems like such a good rental market. And I could see us maybe going back there one day. So it would be nice to maybe have a property to go back to.

And I don’t know, just for peace of mind. If the stock market just blew up, I would have nothing. But at least if I had a house, I could go live there. So, for a little bit of diversification.

So, in the book, you talked about what you look for. You mentioned like low maintenance construction when you’re looking for a long-term buy-and-hold. You mentioned things like solid surface floors, brick exteriors. And I was just wondering, is there anything else you look for, either in how it’s constructed or the type of house, like three bed, two baths, a certain square footage? Is there a sweet spot in your mind as far as what’s a good rental prospect?

Chad: Yes, it’s a really good question. I think there are two components there. There’s the actual building itself. We call that the sticks and the bricks. The sticks and the bricks are really important. And so you want to look at that. I’ll go into that in a second.

But probably the first thing, and the more important thing, is the location of the real e state. I always start with the location. It’s almost like Google Maps. When you zoom all the way out of Google Maps, you’re looking at the big picture view of the whole country, of the whole world, you see certain trends when you do that big zoomed out view. In real estate investing, the big trends you want to look for—

Pittsburgh, I think, is a good example of some positive trends from what I could tell. In general, you want to invest in an area where population is increasing over time. And you could see that kind of data at the Census.gov or the equivalent in whatever country you’re in. And so you just want to see, “Alright, what are the trends look like? Is population increasing?”

Like Detroit, [unclear 27:15]. For a long time, it was losing population for decades. It wasn’t a surprise. Two or three decades in a rows, it was going down in population. It actually might be making a comeback. I’m not 100% sure. I haven’t seen much of it.

But the point is you can see the big, huge demographic changes. You want a city where there’s some net population increase. And you also want a city or a metro area where there’s actually a pretty good diverse economy.

And what I mean by that is if you went into a town where 90% of the employment was from a military base, one military base, the thing that makes me nervous about that is what happens if five or ten years from now, they pull the plug on that military base.

So, what you’d rather have is a diverse economy with a lot of different businesses, a lot of different employment sources. And you’d really like to see professional, young professional kind of employment growing, if you can. So that 20-something or 30-something who makes good money.

You want working class jobs, but you also want some of those white collar jobs as well because that’s going to influence the prices a good bit because they’re the ones buying houses, they’re the ones moving into the new, trendy districts.

If you’re zoomed out on Google Maps, that’s what you’re looking for. You’re looking for that population and the economic kind of factors.

And in general, that can take you an hour to do some research on that. And if you’re from a city, [unclear 28:47], there’s reading the newspapers and studying it. You’ll find out whether your city is doing well there. That’s where I would start.

And then, I would zoom in on the city. And I would more on the neighborhood and the street by street level to find neighborhoods that have some qualities that are attractive places to live. And it’s going to be very different from town to town, city to city. But in most urban areas, or small urban areas, you want to look for things like how close is this property or this neighborhood to a big park, a big public space, or some kind of area that the city or the community has that’s really popular.

In a lot of areas right now, bike trails and parks, little commercial districts with a lot of shops and coffee shops and things like that, it’s very intuitive. When you live in a city, you’re going to know the areas where everybody wants to be. And so you just start with that. I make a little Google Map and put a push pin right in the heart of the city, and then start zooming out like, “Alright, here’s the hottest area where everybody wants to live.” And I draw a big, red background around that area.

And then, the coolest places where the most opportunity will be is right on the edge of those hot areas. You can find something that has some of the similar qualities that’s also close to the park, it’s also close to the commercial district, but it’s not yet as expensive as the best area.

That’s kind of the fun puzzle of looking at locations. You’re looking for those little opportunity areas. And you do all of that before you start looking at specific properties because that’s what’s going to drive your future economics particularly with buy-and-hold.

What I love about buy-and-hold is that you don’t have to be like a day trader who figures everything out like today. All you need to look at is the big, macro level, long-term trends. And those trends are super slow-moving, easy to follow.

Real estate is not like a quick “man, this whole market is crashing tomorrow” kind of thing. Things happen pretty slowly. Even in 2007 and 2008, the downturn happened over like a six to nine month period. And you could see the clouds on the horizon if you were really looking for it.

So, that’s the cool thing about real estate and buy-and-hold. You don’t have to be a genius. As you can see, you can just look at the long-term trends, try to buy on locations that have some long-term possibilities. And then, you get to the sticks and bricks, like the actual property. And what you’re trying to do is you’re trying to generate as much rent as you can for the cost of that building.

And so that’s where we got into the type of building you want to have. I like very efficient buildings. I have a friend who have a property in Seattle. And his rental property basically looked like a milk carton. It’s really like small footprint. And it went up like three or four stories. And it had a tiny, little lawn. He basically said you could cut the lawn with scissors or something. It was so small.

On the other end, if you’ve got a big property that had this enormous lawn, and you had to cut it all the time, if you have a lot of square footage, bigger properties are not necessarily better in real estate. What you want is as much rent per square foot as you can get. And the bigger property you get, every time the tenant moves out, you’re going to have to paint it, you’re going to have to replace flooring.

And so, you want to look for efficient buildings and desirable areas. And then, you want to buy them at a price that allows you to make a reasonable cash flow today. But over time, hopefully, that will get better.

Mad Fientist: I was just listening to a podcast where Brandon Turner from Bigger Pockets was on. Obviously, he’s always looking to add value to a property after he buys it. And one of the things that he looked for was like two bedrooms above a thousand square feet because he always thinks that he could somehow get a third bedroom in there. And that’s a really good way to increase that cash flow that you’re getting from rental income.

Are there any sort of things like that that you keep an eye on as well?

Chad: Yeah, that’s a good tip. Two bedrooms, if you get over 1000 sq. ft., his idea is like maybe you have a dining room that you could convert to a bedroom. And it’s very cheap to build a closet. You just basically frame it out with wood, and then put sheet rock, and put some doors on it. That might cost $1000 or less to do that.

And so, basically, by spending $1000, you now increased the value potentially—in some markets—$10,000, $20,000, $30,000. So that’s what he’s looking for for value add. And I do that as well.

I think another trick is to look for unused space in a building. A basement would be one example. If you could convert a walk-out basement that, right now, is just unused space, just used for storage, you can look for the local ordinances and perhaps you could turn that into an extra rental unit that could actually make money. That’s the kind of thing.

It takes a little bit of local knowledge. Some cities will allow that. Some cities will say there are certain requirements that you have to have. That’s where you study what’s going on locally. And there are tons of opportunities like that where you can just look for unused space and convert it to something different, even parking.

In Pittsburgh and some of the more urban areas, I think parking is a big deal. So maybe you can find a building where they’re not charging for parking right now or where there’s some extra space that you could convert into parking, and then charge people for that. That’s the kind of thing that can turn an average deal into an above average deal that makes extra cash flow.

Mad Fientist: That’s the thing that really appeals to me. We were just looking for a place to rent in Edinburgh because we moved out of our place in the spring. And we saw this small, little apartment come up. It was only like 460 sq. ft. But the space was already really utilized very nicely. And there’s some room for improvement there. And it was like, “AirBnB people don’t care. Edinburgh is such a hot city for AirBnB.” And it’s like, “They don’t care if they have 460 sq. ft. versus 1000 sq. ft. So we could buy this place for way cheaper than most of the places in the city are going for, and then still get the same amount of rent and live when we’re not there.”

And just the thought of 1) maximizing space just super appeals to me because efficiency is what I love to focus on more than anything with anything. But then also doing it up to really high standard. And it wasn’t very overwhelming because there’s not that much space. You don’t have to spend a fortune to do something really nice and make it really comfortable because there isn’t that much space to furnish and paint and decorate and all that stuff.

Chad: Yeah, I love that idea.

And to me, there are so many crossovers when you do real estate between practical financial benefits and also personal, philosophical things as well. You just mentioned liking efficiency. And to me, I’m really interested in urban design and how cities are designed. And one of the main messages I get from smart growth and smart development is you want to have very efficient city design where you have more density in some areas, you have public spaces that everybody can use, and then you have that connected by public transportation and biking and walkability.

And so much of what I think makes people happy and makes me happy in a lot of these urban environments can also be more profitable in some cases. So I love it when you can find the intersection of something that you know is the right way to plan a city. And you can encourage that and make money from it—and to do that again.

And so real estate is very hands-on. And it’s very tangible. And you get involved in your local community. Somehow, I got talked into being on a plane in commission for two years before I left for Ecuador. I’m not going to do that again, but it was a super good learning experience on how cities are designed and sometimes how cities are not consciously designed. Stuff happens.

But on a local level, when you get involved, you can make a big impact. Sometimes, at these city council meetings or town council meetings, there’s like 10 people at the meeting. And so if you’re a passionate person who thinks those kinds of topics are important, and walkability and bike trails are important, you can get in there and show up at every meeting for 30 minutes and make a big impact. And I think that’s pretty cool.

Mad Fientist: That is cool. And yeah, you mentioned being more part of your community. And that’s something that I feel that’s one of the only things that’s lacking in my life and my wife’s life currently. We move around so much, so we don’t ever feel like we’re settled. And since I’m like an introvert by nature anyway, if I know I’m going to leave somewhere in two years, I’m not exactly going out and trying to make a bunch of friends.

All of our friends are either back at home where we used to live or where I went to high school and things like that. And I realized that a big piece of happiness is just like running into your friends randomly and not having to plan week-long trips to go see everybody that you like hanging out with.

So it’s like, “Alright, we’re not going to stop moving around the way we are. So maybe buying somewhere would ground us a bit.” And then, that led me to this thought—which I had mentioned Brandon Turner earlier. And he seems to coin all these cool terms in real estate like house hacking and the BRRR strategy that you read about and stuff like that.

So, I came up with my own strategy that I’m calling peak arbitrage. I’m going to run it by you, and you can see what you think.

Chad: Alright, I love it.

Mad Fientist: You heard it here first. This is the coining of this term if it is a thing. If it’s a bad idea, then I’ll give it to Brandon Turner…

Chad: The Mad Fientist has been boiling something up in his cauldron. I love it!

Mad Fientist: Yes, exactly. This is the first time it’s coming out to the world. So you’re hearing it first.

So, this is the thought.

Since my wife and I are from two different countries, no matter where we settle, both of us aren’t going to be completely happy because one of us is going to be super far away from friends and family that they grew up with, and they’re always going to be like, “Oh, I want to go back to America” and Jill will be like, “Oh, I want to go back to Scotland.”

So, we’re flexible obviously. Jill is still working. But she’s working in a part-time, like just picking up shifts capacity. I’m obviously not working.

So, the thought was—this is like two dreams in one. We love Edinburgh. It’s a great place. And it’s got a fantastic short-term rental market because it’s a beautiful city. It’s extremely walkability. Tourists aren’t going to stop coming to the Edinburgh unless the castle gets blown up somehow.

Chad: It’s been there a while though. It’s probably still going to be there.

Mad Fientist: Yeah, exactly. It’s been there a long time.

And then, my long-term dream was to always just live in a mountainous area so that I could play pond hockey on the weekends and go skiing all the time and maybe get a part-time job as a ski patrol guy and throw bombs and create avalanches and stuff with a bunch of guys like super early in the morning.

So, my thought was, since peak travel season for those two scenarios is quite different, if we bought a small flat in Edinburgh, and we stayed there from say January 1st through July 31st, we’re cutting into some of the peak travel season there because summer is quite big. But we could obviously maybe leave in June, and then travel around before heading to the States.

So then we reap crazy amounts of rental income from peak season there. The Edinburgh Festival is like the biggest arts festival in the world. Just crazy prices for staying in Edinburgh during that time. And then, if we had a house in the mountain somewhere, we could stay there from July through to Christmas, say, and we would get to enjoy the last bit of summer there, get to enjoy the fall (which is one of my favorite seasons), and then ski for a few months before then leaving and renting it out for the big part of the ski season which is Christmas, New Year, and then late winter, and then early spring skiing. And we would be back in Scotland where it’s super cheap because nobody wants to come to rainy, dark Scotland in January through whatever.

So, you’ve got the best of both worlds. You’re getting the best of both lifestyles which, obviously, at this point, it would be a lifestyle play—a lifestyle play with investing in mind. I wouldn’t just go out and buy a boat because I want to enjoy a boat because that’s a terrible investment. But this could be a reasonable investment—maybe not the best investment, but reasonable and yet we’re enjoying that lifestyle as well.

It’s something I would’ve never considered. But somebody that you also interviewed for your book, [unclear 41:36]—which is somebody else we’ve met in Ecuador—he was talking to me about it, and he has some mountain properties and he said they’re actually really great investments where he’s invested. So it made me think, “Ooh, maybe it’s not just a thing rich people buy that just is a complete waste of money. It could potentially be a good investment.”

That’s a long way of introducing you to my peak arbitrage strategy, but what are your initial thoughts?

Chad: I think it’s brilliant! The Mad Fientist has struck again.

To me, I’m just kind of reflecting on it as I talked, but the thing I like about it is owning your residence and turning your residence into an investment is one of my core strategies that I talked about in my book. It’s one of the main ways I talked about people getting started in real estate. And in fact, in your case, it might be the only real estate you need to own. And it does a few things.

I love the fact that you’re getting some of the “happiness quotient” that we talked about—like getting into a community and having some roots. It’s something that my wife and I have talked about a lot too. We know here in Clemson, South Carolina where we are, we have family nearby. I’ve got real estate investments. I’ve got friends. We’ve got friends. We’ve got a community. We’re never going to be totally out of this community. But at the same time, we have these other places we love, and we’re going to travel.

So, I feel completely related to what you’re saying. “How do I have roots, but also have flexibility?” And I think having an efficient, high demand property that you live in, and also do short-term rentals in is just an awesome opportunity. You’ve taken advantage of the technology and the way things are changing in the Internet world.

AirBnB and other short-term rental possibilities, that would not have been possible 20 years ago or probably 10 years ago. And so, you’ve taken advantage of the economy, what’s going on, you’re aligning it with what’s important to you.

And then, as an investment, real estate has several core benefits. One of the first ones is income, the fact that a rental property produces income. When you live in it part of the year, and it’s not going to produce as much income, that’s not really the play. By doing a short-term rental, sometimes, you can make as much income in five or six months as somebody else with a long-term rental would make in a year.

There’s a little bit more work to it. But the main thing I would see on that plan is you’re sort of running a hotel when you do these AirBnB’s. I think you can do this, but I think you need to find some people on the ground, like a really good, trusted person, who could be sort of your co-host. You could pay them a fee, and build that into your numbers to make sure that you’re paying somebody a reasonable fee. It keeps them excited to help you out.

When you’re traveling around in the US or in the mountains throwing bombs to get avalanches, you’re not going to want to hear about something going on in Edinburgh. You want somebody there who can take care of things.

Like what I did in my case, I gave my key person back at home a decision matrix. I said, “Look, if it’s below $200, I just want you to make the decision. And if I don’t agree your decision later on, we’ll talk about it. We’ll learn. But I’m not going to penalize you for you making a decision that you thought was the best thing.

So, that’s what I did. They could make a decision. “I trust you. If it’s a $500 decision, okay, text me. I’ll get back to you.”

So, that removes a lot of the day-to-day stuff. I think, in your case, having some management on the ground will be the key piece of the puzzle t make that work, and then also finding the property you were talking about earlier—that efficient property that makes you happy, that’s walkable.

But also just looking at the numbers and seeing what those numbers look like, I’m willing to bet that, over time, if you owned a property in Edinburgh, like an efficient 400 or 500 sq. ft. kind of apartment in a good location, the appreciation play on that over the next 20 years is probably going to be pretty good. You’re giving yourself a good hedge to other investments and other money that you have.

Mad Fientist: Alright. Well, I’m excited. That’s really good.

Talking about having that efficient place—efficient also in the sense of longevity and durability, I guess, is what my question is—do you know of any good books or online resources that dive into like, “Okay, if I’m going to create this with the sense of maybe renting it out to short-term people on AirBnB, what’s the best sort of materials to use for all the different areas of the house so that it lasts and it’s easy to maintain?

Chad: Yeah, I mean Bigger Pockets is a good community to get in for that. I don’t know anybody with any books particularly. You could just YouTube. Every house problem that I don’t know how to solve, I YouTube it, and I almost always find some guy or lady showing me how to do it. So you could do YouTube.

And then, Bigger Pockets, in the forums, there are tons of conversations about materials for rentals. Should I use luxury vinyl tiles or ceramic tile? And what’s the cost difference? That’s one of the cool things about real-time communities is that you can just ask questions. For example, you could post your question on there. “I’ve got a 500 sq. ft. apartment. It’s going to be a long-term rental. It’s going to be AirBnB. What floor surface has gotten all of you the best return on your dollar long run so that it’s durable and I don’t have to keep replacing it.”

So, that’s a place I would go. But in general though, the longer you’re going to hold an investment—some of the mistakes I made personally was being cheap on my materials. “Oh, that’s the cheapest way to do it right now.” And then, you install this product or whatever, and it ends up costing you a lot more in the long run.

I’ll give you an example. We’re selling a house right now. And during the inspection, when the buyer had their inspector in there, they found a leak behind a wall and a bath tub. Somehow, they saw it, like some of the floor was wet from when they look from underneath the house. And this is probably installed before we brought the house. And we learned after taking out the carpet and the floor—we had to rip the entire bath tub out—all of the joists (the joists are like the support beams underneath), they’re all half-rotted.

This entire floor system was like wet and rotted. And when we finally got it all ripped out, they showed me what had caused all of that mess in these thousands of dollars of damage that I’m having to now replace. And it was this one little connection piece where the shower head connects to the pipes behind the wall. It was plastic. It was this little plastic piece. Somebody had just twisted it too much.

And they said, “You know, if that had been a metal piece, whoever had bought that had not bough the ¢50 and they bought the $1.50 piece instead, you would not have to spend like thousands of dollars.”

And I said, “Oh, my God!” What a revelation.

If you can go a little bit more expensive on a long-term property, if it’s going to be more durable and less likely to break over the long run, go for it! It’s probably going to be a good investment.

Mad Fientist: Yeah. So that’s the [unclear 49:03] for me because I’m always looking for the cheapest thing. And that’s why these smaller properties appeal to me so much. “Okay, it’s 460 sq. ft. Even if we pick the nicest tile or whatever for the bathroom, it’s not going to be breaking the bank if it lasts longer. And it looks good for 10 years or 20 years instead of 5, then that’s going to be worth it.”

Chad: Exactly.

Mad Fientist: That’s good to hear because, yeah, I would definitely be in that camp of trying to save the pennies.

So, my peak arbitrage strategy gets the thumb up?

Chad: Yeah, I like it.

Mad Fientist: Good! The flipside of that, I guess, is something else that I read in your book. And you had mentioned something from the Financial Samurai. Sam had said something about buy utility and rent luxury which, in this case, would be the exact opposite because Edinburgh is very expensive. And I’m sure anywhere a mountain property we would buy would be very expensive. And the sort of argument behind rent luxury by utility is that it doesn’t make sense in these markets to pay the premium to own because, a lot of the times, the rent’s a lot cheaper. And Edinburgh is a perfect example. This flat that we’re considering is £800 a month to rent or I think it ended up going for something crazy which is why we didn’t get it because we didn’t even get close. I think it went for like £260,000 to buy. So the 1% rule that you often hear about, that doesn’t come anywhere close.

So, in that case, what Sam from Financial Samurai was suggesting is rather than spend £260,000 to buy a 400 sq. ft. place in Edinburgh to save £800 in rent, you’d be better off taking what is effectively US$300,000 and maybe buying three houses in Pittsburgh that would generate, I don’t know, $2400 in rent. And then, you could use that to pay your rent in Edinburgh and then pocket good profit.

So that’s also very compelling too. Obviously, the lifestyle wouldn’t be the same in that scenario. But what are your thoughts on that strategy?

Chad: Well, that’s basically the strategy I use. People, they’ve talked to me about beach houses and mountain houses. And I’m perfectly happy renting a mountain house or renting a beach house.

But I think it’s a little bit different than your peak—what is it called, peak arbitrage?

Mad Fientist: Peak arbitrage… oh, man. See, the branding must not be good if you already forgot it. That’s terrible! I need Brandon Turner to give me a good key title.

Chad: Yeah, yeah. Let’s brainstorm with Brandon a little bit about that. I think we can make it work. But it’s a little bit different because there’s also the utility that we talked about, those factors.

And I see Edinburgh and living in a downtown area is a little bit different than living at a vacation spot. I’ve been thinking in your case. Maybe you own in Edinburgh or you own in the mountains or one or the other. Maybe you don’t own them both. And then, maybe you take some of that other money. You allocate a certain amount of money to real estate that you’re comfortable with in your overall portfolio. You put some of the money into whichever place makes the most sense financially, whether it’s Edinburgh or the mountain. And then, you take the rest of the money. And basically, what I do is just own solid rental properties that produce good incomes in areas where the rent-to-value ratios are good and where the long-term economics that I’ve talked about earlier are also good.

The thing about big cities like San Francisco and New York, some of those places, they have the best long-term economics. People are always moving there. Urban areas are not going away. But their short-term economics are really, really tough. It just depends on what your goals are, how much income you need.

You’re probably going to make a lot more appreciation in some of those long-term places like Edinburgh. I can just imagine 20 years from now a property in Edinburgh being worth a lot more because it’s really difficult to build. It’s really difficult to find places, any kind of land, I imagine.

Mad Fientist: Oh, yeah, absolutely.

Chad: It’s just going to be almost impossible. And so you’re basically playing on the fact that supply is super limited in the core of the city. You don’t know how that’s going to affect your long-term investment, but that’s supply and demand. You get high demand, really low supply. So maybe—

This is kind of a Warren Buffet play. Warren Buffet learned, in his career, he used to buy the super dirt cheap companies that had awesome metrics. You can buy it dirt cheap. He learned eventually though that he would try to buy the best companies, the really solid long-term companies, and he wouldn’t be able to get those at as much of a discount. But they were growth plays. They were long-term plays.

So, all the companies he owns now like Geico and Coca-Cola—I’m trying to think of all the different ones—he didn’t get a steal on those properties, but he’s made a ton of money in the long run.

And so, I guess going back to your point, I think a combination of those two could be good. I see a principal residence in a core location. If you buy it, and you get a ton of utility, and you get a ton of satisfaction out of being in the same place in a good location, and the short-term rental kind of changes the economics a little bit—you mentioned $800 a month as a rental cost, but I wonder what the short-term rental numbers…

Mad Fientist: That would be over £100 a night. It’s over £100 a night, especially in the summer. I haven’t checked. I’ll see what it is in the fall and the winter. But yeah, it’s over £100 a night for something that’s small in that exact location.

Chad: So, even if you had 50% occupancy for the year—I’m trying to think in rough numbers. Three hundred sixty-five, 150 days a year, that’s £15,000 or something like that for six months.

Mad Fientist: Right, yeah, exactly.

Chad: The point is I guess the economics can—this is what you do in real estate. You got to find a little niche. If you just get to play the average, normal stuff, the numbers might not look great. But if you can get an awesome location, and you can do something like short-term rental or some other kind of niche to get more income from it, you can now turn—maybe that’s not the 1% rule still, but it’s a decent—you kind of get that some of that Warren Buffet kind of quality property territory where you’re making a decent income, you’re getting a lot of utility, a lot of joy, a lot of satisfaction out of being there and being part of a community, you’re getting appreciation.

And then, you could take another chunk of money if you really wanted, like the solid income, go to a growth area in Pittsburgh and buy a property for $150,000 that maybe rents for $1200 or $1500. And the numbers are going to be better. So you’re sort of diversifying between those two strategies.

Mad Fientist: Nice, alright, cool. That’s great to hear. And one of the interesting things about the Edinburgh thing which actually was the only reason I started actually looking into it is because the pound has dropped so much. And since all my money is in the US, even though real estate is still hot in Edinburgh, to me, it’s sort of on sale because that currency exchange rate dropped so much. So it’s maybe a good time for me personally to buy. Whether or not it’s a good time with a hot market in Edinburgh, that’s a different story. But if it’s a long-term play, then obviously, I’m not going to get into currency trading or anything like that if we’re talking about Forexer stuff because that’s mostly speculation.

But it’s like, well, relative to the past, this is actually looking more on sale than it has been in a long time even though the market itself is quite hot.

Chad: Yeah. Yeah, I agree. And you made a really good point earlier that I wanted to go back to about buy utility and rent luxury. In general, that’s still a good strategy for everybody to think of. The point is like you could go to one extreme like Jeremy, our friend at Go Curry Cracker. He and I have debated back and forth about ownership versus non-ownership. If you’re super mobile, and you’re just not wanting to settle down anywhere, owning 100% investments and always renting everything, that works. That’s cool!

I think what I love about this conversation is we’re bringing in the nuance of what makes us happy and also what’s profitable. When you have some knowledge of real estate, and you can sort of diversify yourself into it, you can have ownership of property and flexibility just by knowing how to operate a rental property and by doing that.

And that’s what I found. My trip to Ecuador was an experiment. Can I own properties that have a lot of utility and then have the flexibility for our family to do whatever makes us happy.

And for that 17 months, that’s what made us happy. I don’t know what it is going to be two years from now. But having some well-placed chess pieces within the real estate board and within other investments gives you tons of flexibility if you plan it ahead of time.

Mad Fientist: So, for someone who is enjoying the flexibility and the low stress of just owning index funds pretty much, one of the biggest worries about diving into real estate for me personally—and I’m sure a lot of people in the audience—is maybe liability.

Is that a concern for you? Do you mitigate or weight some of those risks through LLC’s and things like that? How do you think about liability?

Chad: Yeah, it is a concern. I think the first line of defense is not even financial. It’s just running your business in a way that you treat people right. And if you do have problems which, inevitably—even if we try our best and treat our tenants right and do everything we can, sometimes things happen. I’ve had an issue in an apartment where they left for the summer and something malfunctioned. They didn’t leave the air-conditioner on. And in the deep south—you went to school in North Carolina, right? You know how humid it gets in the summer around here. And so we ended up having some moisture in there, having some mold grow. It was just a stressful situation for everyone involved.

I’m not saying that the tenant was completely happy. But we communicated with them. We did our best. We all tried to solve the problem. I didn’t ignore it. And therefore, the liability was reduced.

We solved it in the end. It cost me some money. But also, they walked away and we all kind of agreed to be friends.

And so, I think how you run your business has a lot to do with the amount of liability you’re going to have. I think the horror stories people hear about, lawsuits and craziness, my anecdotal evidence is that they’re coming from people who kind of run their properties like a slum lord. They don’t take care of their property and they don’t treat them right.

So, if you look at your relationship with your relationship with your tenant more as a partnership, like they’re the employee or the partner who’s helping you operate your business, then you’ll treat them differently.

And I think everybody who’s listening here, none of them are running out trying to screw people over. They’re going to try to treat people right. I think that’s the first thing I would say. You’re probably going to be fine there.

But then, beyond that, insurance is a big deal. So even if all that fails, you want to have a liability insurance. And it’s actually super cheap. On a regular house in my area, I get landlord insurance in case the house burns down and have an accident like that. And you also get liability insurance, meaning if something happened, if somebody sued you, you can get up to a million or $2 million super cheap, like $100 extra a year to increase it.

And so, to get a million or two in liability insurance is really going to be helpful for most things you need to worry about.

And so, those are your two first lines of defense. And I’m not ask that protection kind of person. There are attorneys who study this stuff and who are really good at this. And so beyond that, owning a property and an LLC is probably prudent. That’s what most attorneys tell me at least just so you don’t combine your real estate property asset and liability with all of your other index funds and other assets that you own.

So you’re just basically keeping them in separate baskets and running that as a separate business, so that if the worst case happened, you’re at least kind of quarantining your problems there.

Mad Fientist: So, you interviewed a lot of interesting people. And you said you learned a lot. Were there any strategies that you heard about through the interviews that you now may choose to implement?

Chad: Yeah. So there’s one about doing 1031 exchanges. Let me explain what that is in a minute. It’s a strategy I have not used, but I’ve known about for a long time. Basically, what it means is when you sell a rental property, one of the tax benefits, which I’ve written about in your site with the tax benefit article, is you can sell a property in real estate. And as long as you replace it and follow the IRS’ rules with a similar property, then you don’t pay taxes on that transaction. And that’s a super big deal.

And so, for me, because I’ve accumulated properties, I’m now in the stage of sort of moving the chess pieces around the chess board so to speak. I’m selling some properties that are not optimal. And I’m replacing them with other properties. And by doing that, you can really accelerate your wealth plan or your income or the quality of your investments without paying taxes. It’s super tax efficient.

And so I’m actually in the process right now of doing my first 1031 exchange. Studying the books and listening to others sort of showed me what I already knew, but this sort of demonstrated the power of doing that. And it’s something I’m going to play around with as well.

Mad Fientist: Oh, nice. And hopefully, we read about it in CoachCarson.com?

Chad: Absolutely! I’ll show you all the numbers and share the details for sure.

Mad Fientist: Fantastic! Well, this has been amazing, as always, chatting to you. I know I’ve cornered you in coffee shops in Ecuador before to talk about this stuff.

Chad: Any time, any time…

Mad Fientist: So it’s always a joy. And I always end all my interviews just asking what’s one piece of advice you’d give to somebody on the path to financial independence? And I’ve obviously asked you this in our last interview which was a couple of years ago. So it’s fun to ask that again just to see if your thoughts have changed.

So, what’s your one piece of advice this time?

Chad: Yeah, I’m going to go with the theme of my book. And it’s becoming the theme of my life that I’m trying to get out there. It’s just do what matters. And I think this applies whether you’ve reached financial independence or not. I think that’s my lesson from my reading of your articles, and what you’ve realized after financial independence, and my own realization. Life doesn’t start when you get to the peak of the financial mountain. Life is like all along the way.

And so, if you’re climbing that mountain, you can do what matters now. Enjoy your family if that’s what matters. Enjoy your friends. Take time to travel. Take mini-retirements. If you have a cause or something that’s important to you, or you think is important now, don’t wait 15 or 20 years from now when you have enough money. Just do it now.

Get involved. I think that philosophy of doing what matters and kind of building your life around it has been really refreshing for me. I’m a money nerd. I love the spreadsheets. I love real estate. But when it comes down to it, the joy and the happiness you get out of your life I think is aligning that money with the people and the causes and the activities that really excite you and make you passionate.

And so, I’m working on that. I’m not perfect for that. But that’s kind of my aspiration. And I guess I just encourage people to do the same.

Mad Fientist: Yeah, I couldn’t agree more. And yeah, as you mentioned, that’s something I’m realizing more and more, how important that is.

Your answer is different than the first interview, but both were good. This one shows that you’re sort of on the same path as me. You’re thinking and realizing that money is not everything. Your first answer was similar to that vein. If you remember, it was keep it simple. And that was with investments and that was with life in general which was a great advice. The more I’ve simplified, the just happier and more carefree I feel.

Chad: For sure…

Mad Fientist: But yeah, you can see that your thinking has been evolving just as mine has been. So that’s good to see.
Chad, thanks so much. This has been great. I’m so excited about the book. So if anyone wants to get it, should they just head to Amazon? I can maybe link to it in the show notes.

Chad: Yeah, if you look up Retire Early with Real Estate on Amazon, it’ll be there. I actually recorded the book. So if you can put up with my southern accent for eight hours, then you can join me on the audio book. And also, there’s a digital book and a print book.

And if you’d like to order on Bigger Pockets, they actually have some—you can get it on Amazon, but on Bigger Pockets, I did some bonuses where I interview people like Paula Pant and Lisa Phillips and one of my mentors, John Schaub, Building Wealth One House at a Time. It’s really cool for me to interview him because he’s been doing basically what I’m doing for like 40 or 50 years. And so it was really fun for me to get to pick his brain about early retirement.

He actually took a little shot at the FI community. He was kind of joking. He’s like, “I don’t really like to be frugal. I like airplanes.” That was it! I was like, “You’re kind of boxing in the whole FI thing.” But it was fun. He was like, “I like airplanes. So I just buy another house or two to pay for my airplane habit.”

Mad Fientist: You mentioned that book on the first time I interviewed you. So that must’ve been really cool to interview the main book that you recommended I think it was.

Chad: It was really cool. I interviewed him. And that interview is available. If you buy it through Bigger Pockets, you get those as kind of a bonus for buying through them. So that might be a reason to check that out. It’s just fun to get to hear other people’s perspectives other than mine on this whole journey of financial independence.

Mad Fientist: Very cool! Well, I will link to all of that in the show notes, so you can find that there.

Anywhere else people can find you? Should they just head to CoachCarson.com just to say hello if they want to chat.

Chad: Yeah, yeah. I’m on CoachCarson.com. I’m still publishing weekly. If you’re interested in this whole concept of investing in real estate so that you can retire early and do what matters, that’s my mission. That’s what I’m doing every week. I’d love for you to join me over there are CoachCarson.com.

Mad Fientist: Cool, man! Well, thanks again. I look forward to seeing you in Orlando, right?

Chad: Yeah! See you soon.

Mad Fientist: You’ll be there for FinCon?

Chad: I can’t wait! FinCon 2018.

Mad Fientist: Very cool! I’ll see you in like a month.

Chad: Alright!

Mad Fientist: Excellent! Alright, man. Well, it’s been a pleasure. And yeah, I’ll speak to you then.

Chad: Thanks for having me.

Mad Fientist: Alright! Thanks. Bye!

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30 comments for “Chad Carson – Retire Early with Real Estate

  1. Justin K.
    August 31, 2018 at 7:53 am

    Brandon,

    I invest in real estate (currently own 11 units) about 30-60 minutes north of Pittsburgh, but I work downtown almost everyday. If you want to get together for lunch sometime feel free to send me an email. Love talking real estate and financial topics!

    Justin

    • August 31, 2018 at 9:51 am

      The Pittsburgh real estate empire of the Mad Fientist begins:) Sounds sort of evil! Lol.

      Pittsburgh is such as cool town. I can’t wait to come up and visit.

    • August 31, 2018 at 5:41 pm

      If there is a Pittsburgh Mad-FI Meet-Up, I am so down! I also live also 30 mins North of Pittsburgh in Cranberry Twp. I’ve been hooked on learning more about real estate by being hooked to Bigger Pockets Podcast. Glad to listen to Coach Carson on this episode.

      Justin, are we neighbors? I like chatting about FI… let’s be friends :-)

    • The Mad Fientist
      September 9, 2018 at 4:16 am

      Hey Justin, that’d be great! I’ll let you know next time I’m in the burgh!

  2. August 31, 2018 at 8:26 am

    Great to see another available podcast and with a great guest too. Lots of quality information. As always, thank you!

  3. August 31, 2018 at 9:52 am

    Just met Chad at a CampFI event. Such a great guy and a great story. I can’t wait to listen.

  4. Dart25
    August 31, 2018 at 10:44 am

    Real estate was the best decision I ever made. We are just south of Portland Oregon (commuter city for it) so prices are a bit nuts, but we now have 62 total units. The tax code is VERY good to real estate investors especially when you understand the primary home exemptions, 1031 (or reverse 1031) and my favorite, Airbnb for 5 months on the primary home…we do that, this next summer we will be 5 months at the beach and during that time our primary home (in a Vineyard area in the Willamette Valley) will generate enough to pay for our housing for the whole year.

    • Dakleb
      August 31, 2018 at 11:39 am

      Love to hear the Willamette valley AirBnB success! We’re further south (closer to Salem), but have had amazing success renting out our mother-in-law suite. We’re in our first RE year, but I am continually amazed at the tax advantages. I think RE can be the next ‘tax-advantaged’ account if someone has already exhausted those investing options from their w-2 income.

      • RShermanDart25
        September 2, 2018 at 1:22 pm

        Thanks Dakleb! Some of our rentals are in Salem, that market is going to keep getting better! Agreed 100% on the tax advantages like qualities of real estate. We are looking at traveling each year for 5 months (pick one location and go there, next couple of years will be the Oregon Coast since we have a 2 month old, but after that we are thinking Chiang Mai, Scotland and when kids are a little older, South America so they can start to learn Spanish.) Like MF says slow travel and have a base to explore from, also works as a base for family and friends visiting.

        Anyways, combining a less than 50% rental (to maintain it as your primary home) with Airbnb/VRBO allows us to cover most or all of the costs of living (mortgage, cost of down payment money, all utilities+ cost of living in another place for the 5 months we are gone) so we are mostly living for free PLUS we bought a place that needs some work, so in 2 years or longer we STILL get the primary home exemption for capital gains….unreal!

        Granted it takes really planning out the home purchase to appeal to renters (we sort of accidentally did it by buying a home that was really a partially finished winery and living space.) If you can be intentional and plan and live in an area with high demand, it can be a fantastic way to turn your most substantial expense (housing) to generate if not a profit, at least NO net cost and allow some travel.

        Sorry for the long reply!

        • September 10, 2018 at 9:44 am

          Love this!! Way to max out your primary residence.

  5. Justin Park
    August 31, 2018 at 10:51 am

    Brandon, I’ve heard you talk skiing before and thought to email but hadn’t — until now. I live in Breckenridge and I can vouch for this town having a very strong hockey scene with an indoor and an outdoor rink and multiple skill divisions with league games almost every night. Lots of lakes around as well for pond hockey. The 9600′ elevation means even in really crappy snow years i.e. 2017-18, we still have a full ski season. 5 resorts within an hour’s drive. That’s my sales pitch. Send me a message if you want more details. Would be happy to show you around.

    • The Mad Fientist
      September 9, 2018 at 4:21 am

      Thanks, Justin! Breckenridge seems perfect so I added it to my list of places to check out when we eventually start looking for real estate. I’ll get in touch before we visit and we can try to meet up for a coffee or a beer!

  6. August 31, 2018 at 11:06 am

    Brandon,
    There is a section of the BiggerPockets forums for the Pittsburgh area – https://www.biggerpockets.com/forums/743-pittsburgh-real-estate-forum. There is also a “Pittsburgh Real Estate Investors” on Facebook https://www.facebook.com/groups/Pittsburghrealestateinvestors/

    The Facebook group seems to be much more active than the BiggerPockets, though BP is an amazing resource overall.

    Personally we (my wife and I) are under contract for a duplex about 30 miles north of Pittsburgh – it seems to be pretty close to a 2% deal that is set to cash flow even with money set aside for property management (though we are going to try to self-manage this first one). All of the major mechanicals are updated and it just needs minor repairs (under $5k), but other than that is pretty close to “turnkey”… fingers crossed.

    Currently our plans are to buy another property every year until we get to 5 and then start paying them off – using our after tax savings from our W2 employment plus cash flow from the rental portfolio (properly adjusting for capex, vacancy, project management, etc.) If everything falls into place (and I know there will likely be speedbumps along the way) we should have 5 fully paid off rental properties generating around $35,000-40,000 per year in seven years. I know reality will look different from that based on what kind of deals we are finding and how much our initial cash outlay is, but its good to have a rough plan.

    F.I. Nomad has a good spreadsheet that we used to analyze properties – https://finomad.com/post/2018/4_21-ultimate-spreadsheet/ BP has a calculator too but unless you get a pro membership (which has tons of other perks, and may well be in our future before our next purchase) you can only use it 5 times. The spreadsheet more or less does the same stuff.

    Closer to the city you may be looking more at long term plays in terms of buy and hold – the cash flow isn’t going to be there from day one. Properties that are upwards of 1% are going to be more on the fringes between the OK neighborhoods and the currently sketchy neighborhoods. As with any area, “hot neighborhoods” (Lawrenceville, Southside, etc.) are going to be more appreciation moves. There seems to be a lot of opportunities for BRRRR in the area, but I would have boots on the ground, especially if you haven’t been living here for a few years, as the neighborhood dynamics have changed. Specifically a lot of developers have built up the East End with luxury apartment buildings that have vacancy rates above 40%, so we have a lot of luxury vacancy and not enough low / middle class rental supply.

    I am fairly new to REI but I have lived in Pittsburgh my entire life and have a good feel for the area so feel free to reach out.

    • The Mad Fientist
      September 9, 2018 at 4:44 am

      Thanks very much, Nick!

      I just joined the PGH Facebook group so look forward to seeing what people are saying there.

      I’ll let you know next time I’m back for a visit and we can try to get together for a chat, if you’re up for it!

  7. Gabe
    August 31, 2018 at 11:09 am

    Great podcast. How does investing in real estate impact a Roth conversion ladder? If your rental income brings you above the 15% marginal tax bracket, then it wouldn’t make sense to execute the conversion ladder, right?

  8. August 31, 2018 at 12:06 pm

    Great podcast with lots of helpful info, thank you! I think this may have been mentioned once, but I think it’s worth stressing that getting advice from a real estate attorney BEFORE investing should be a must for people. I’ve seen inexperienced investors buy properties without doing their research and get burned by surprises after closing (especially with the foreclosed properties). And speaking of foreclosures, lenders don’t necessarily end up with the property at the end of the process as was mentioned in the podcast. And if they do, the possibility of a delinquent mortgagor having other liens for unpaid utilities, federal taxes, second mortgages, etc, is high. The process varies depending on state law, and there are a lot of traps for the unwary, so that is also an area where getting some legal advice in advance is imperative in order to avoid paying exponentially more to dig out of those problems later. I’m sure the book addresses all of this…sounds like a good one! Thanks again.

    • The Mad Fientist
      September 9, 2018 at 4:50 am

      Absolutely! Thanks for the advice, Jennifer.

  9. August 31, 2018 at 6:59 pm

    This podcast was awesome! I’m just starting to dip my toes into real estate and I can’t wait to unlock the financial freedom it provides. I’m definitely learning from the best so I should be in good hands. Thanks guys!

  10. August 31, 2018 at 10:51 pm

    Great episode! I loved your idea of peak investing. Even though it might not be as lucrative as investing in areas that meet the 1% rule or close to it, the value add of having property in two areas you love being in probably makes it well worth it. Also, didn’t realize you’ll be at FinCon! Looking forward to meeting you.

  11. September 6, 2018 at 11:48 am

    Hello,
    I am in the position to be able to buy rental but I don’t know where to begin. Because my primary home is mortgage free, I have been seriously thinking about buying rental property. It’s just that I don’t know anything about renting property. I would love to know of any resources that I can research to help me get started.
    Thanks

  12. Mike B
    September 9, 2018 at 2:39 pm

    Brandon,

    Pittsburgh is a ski town, Brother! The mountains to the east and southeast offer numerous opportunities for downhill skiing and the more adventurous and physically challenging – XC skiing. When I first started following the podcast a couple years back, I thought I noticed an ever so slight Pittsburgh accent. So I was happy to eventually learn of your Pittsburgh roots and I highly suggest making the city part of your future of arbitrage.

    My current path to FI is something I stumbled upon after buying a duplex in the south hills of PGH. I had some mustachian tendencies which led me to the point of buying it, but it wasn’t until I started living in and renting the duplex that I realized “this could actually happen.”

    I have been following the market here for the past several years and I have noticed a few trends that would lead to cautious investing. The first is that there is an abundance of luxury apartment buildings that have been built over the last 5 years in the more trendy areas. Many are offering renters large incentives which leads me to believe that the demand isn’t there (yet?). The second thing I have noticed is a high amount of interest in a limited number of properties for sale. I have called on a few properties only to find that they had multiple cash offers within 24 hours of listing.

    I still think there is opportunity, especially with a creative approach. Maybe in the area of urban efficiency housing?

    Keep up the great work, I am a huge fan!

    Best of luck,

    Mike

  13. Chad
    September 11, 2018 at 2:17 pm

    Ok, I’m a bit late to the game, but I’ve got a potential re-brand for your “Peak Arbitrage” idea. Since you’d be renting the places out during peak season, you’d be living in them during what they call shoulder season. And you be rolling from one spot to the next, right? See where I’m headed with this?
    …Shoulder Rolling.

    • September 17, 2018 at 10:34 am

      Lol. I wish I would’ve thought of that! I was trying to remember Brandon’s “Peak Arbitrage” name on another podcast and I drew a blank. Either I need to work on my memory or we need to keep working on names (probably the first!).

  14. September 27, 2018 at 12:42 am

    This is one of the best podcasts I have listened to lately. Lots of sound advice for those who wish to FIRE with real estate. Thanks a lot.

  15. October 9, 2018 at 2:38 pm

    Definitely looking forward to listening to this. Breezed through the transcript a little bit and am now incredibly interested

  16. October 24, 2018 at 8:03 am

    This is the best website I have found on how to retire early with real estate. Really Chad you nailed it, man.

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