How the 2-5-7 Rule Builds Cash Flow for Life in Real Estate | Andrew Holmes

Andrew Holmes (00:00)
I always had this philosophy that if you are a short-term pessimist, but a long-term optimist, you will be a good investor. What I mean by that is in the short term, if you’re not scared, you need to get your head examined. But in the long term, You have to be the guy that says, okay, it’s gonna be a brighter future. So in the short term, when you’re scared, when you’re paranoid, you’re gonna be very, very picky how you pick deals, how you make investments. And you’re gonna probably sometimes let go of some properties, which is okay, which is being scared is a good thing. But you have to invest for the future for the long run.

Issa Hanna (01:09)
Welcome back to another episode of the Real Estate Pros Show. I’m your host, Issa Hanna, and today we have Andrew Holmes here to share his knowledge with us. Andrew, welcome to the show. Thank you.

Andrew Holmes (01:17)
Super thrilled to be here.

Issa Hanna (01:19)
Man, I’m super excited to have you. You come from a town near and dear to my heart where I built my personal real estate career, Chicago, Illinois. So I’m gonna enjoy talking to you. But for my viewers at home, can you give them a rundown of a day-to-day in Andrew’s world?

Andrew Holmes (01:33)
Yeah, it’s all about finding properties, right? That’s the focus, which is being able to acquire properties at great prices. And typically for my personal portfolio, I’m looking for properties in B to A areas. So that’s difficult to find in B and A areas. I try to stay out of C’s and D’s. So the goal is what can we buy at auctions? Because we’re the biggest buyers at auctions at all the sheriff sales. So that’s number one every single day. And then from there, online auctions too. A lot of deals come from wholesalers, referrals, that sort of thing, and then running Chicago REIA and the rest of it. So that’s how the day is divided.

Issa Hanna (02:11)
I love it. And you do run Chicago REIA, which has over a thousand members, very well-respected community. As a former real estate professional, I know many, many people that were in it. You guys, yourself have put together such a great group. And one of those things that stuck out to me when you were telling me earlier is a philosophy you have, and I want you to get into it. 2-5-7 philosophy. Can you break that down to my viewers?

Andrew Holmes (02:35)
So the basic idea is for most real estate investors, right? Even if they have rental properties, if they’ve been in the real estate business for a long time, if you ask them, hey, for the last 10 years you’ve been in the business, what do you have to show for it? Most people would be stumped, meaning they’re like, well, I have 10 rentals. Okay, what does that mean? What is the net asset value minus liabilities? What is the net equity in the property? And what is that in terms of cash flow a month? That’s all I’m concerned with, right? That if you say, okay, every month, Andrew, I have 15,000 net coming in without running on the treadmill. So then the way I look at it is you take the 15, you divide, take 25% out. So your actual cash flow will be somewhere between 10 to 11,000. That’s how, because I’m a very, very type of a realist. So to get there, I have a basic philosophy, which is called 2-5-7. In two years, how do we teach somebody who is brand new? How to be able to buy five to six properties and get them paid off on a payoff schedule over the next seven to 10 years. Because if people just focused on that, right? Just that one simple idea. So we call it 2-5-7 Cash Flow for Life. And they’re like, my God, is that even possible? And what happens is once they do one property, they’re like, man, I know I can double it, right? I know I can do one more. I can bumble my way into one more. Once they do two, it’s like, dude, I think I can get to five. And it goes from, my God, an accident, which is one, to pain in the ass, which is two. By five, it becomes a business. And the only philosophy we’re trying to get across to them is you’re not going to touch your cash flow income. Right. I have since 2011 I’ve owned rental properties. I have never, ever touched one penny. Of actual income that came in from rentals. It’s gone back into either paying down properties or buying more rentals. And if you’re buying them at the right price and you have that discipline, there’s no better way. It takes a little time, but there is no better way to build true wealth with real estate. So

Issa Hanna (04:43)
Unbelievable. Truly unbelievable. There is a way to pay them off in seven years. You have it. You can teach them how to do it. Building that equity and getting that monthly cash flow is true wealth. Like you said, you can flip as many properties as you want, but you got to keep chasing that next dollar. When you have it sitting in there, like you said, without running on the treadmill, and it’s coming in every month, it’ll build your own wealth. And I love the number five. You get to five, it becomes a business. It becomes a cash-flowing business. It starts buying itself, doing it on its own, So it’s going to be tough the road from one to five, but once you get to that fifth one, I don’t want to say smooth sailing. Nothing’s ever smooth sailing in real estate. But it becomes a lot easier. And I love that. And I wanna go into one of your strengths because you touched on it earlier. One of your main strengths is you’re great at finding deals. So give us a strategy you might have picked up along the years and how you find such great deals

Andrew Holmes (05:40)
So a lot of times what people believe is that you have to spend a lot of money to find great deals. You actually don’t, but you have to know what a good deal is. Right. A lot of times what people will do is we have some phenomenal, phenomenal wholesalers in our market. They find a lot of properties. It’s not that they don’t find a lot of properties, but the quality of the properties, meaning the underlying area. And the underlying tenant pool because the location, those are not necessarily the best for me. Right. So I’ve always looked, I’ve always believed that you find what you look for. Meaning, if you’re looking for a great property, you’re going to find a regular property. If you look in a shitty area, you’re going to find a lot of shitty properties. Not that they don’t make money, but those are properties I don’t want to hold. To wholesale them, great. To flip them, great. But I don’t want to hold them. So my belief has always been that over the period of time, MLS, you can find some phenomenal deals. But then the question becomes is, do you know how to look at them? Meaning, do you know the back-end values in an area? And today we were talking about this as we got started. A lot of times people think, my God, the foreclosure numbers are up. So I’m just gonna buy properties like I did in 2008, 12, 15, 18. That’s not the case. The market today is more sophisticated than it was at that time. There’s more money available, whether it’s hard money, whether it’s private money. So today, your knowledge as an investor, meaning truly understanding the backend value. So I’ll give you example. You know Chicago well. So we have an A area called Oak Park, three-unit building listed on the MLS, 450, right? I just picked it up for 375. About 70 to about 100,000 work, let’s just say. But for a three-unit building, backend value on that is 750, right? That’s an MLS property. Now people are like, my God, you got lucky. No, no, no. It was sitting on the market 50–55 days. The seller was a little bit overpriced for what the building is. Not a lot. But if I go from a three unit and finish the basement, which is a nine-foot basement, I’m increasing the back-end value. So I call those properties that fall through the cracks. Because I know the back-end value so well, because the rental pool is so good in that area, now you’re creating a deal. Right. Rather than just going, and that’s the part of it. A lot of times people want to skip over. They think they’re just going to go through in the MLS one day, I found a deal. Just because you decided that you got excited about real estate today. Real estate gods are not going to serve you a deal. Right. That you can’t. And this is where a lot of times new people and even seasoned people go sideways where they try to force the market. You can never force the market. You have to be ready and wait for the market to lay up a deal to you. And every 15 days, 30 days, it’ll give you a deal. But you have to be ready and you have to be looking. Same thing with auctions. It’s exactly the same thing. Online auctions. I generally will bid on a property 15, 20, 25 times, right? And it’s okay. If they don’t sell it at my price, that’s okay. But you’re gonna find them, whether it’s Xome, whether it’s Auction.com, whether it’s HomeLink but so the whole Thing what I’m seeing a shift in the market is that deals are not as obvious as they used to be in the past. And the second thing is what we have had tremendous success with is if you’re because everybody wants that secret list. What is that secret list I can do mailing to or I can do calling to and find the best deals, right? And the secret list is the ones you work, right? But for me, the secret list always is one with the highest amount of equity. With the highest amount of urgency. So for example, if somebody is a pre-foreclosure and they’re 30 days from auction, but they have 150,000 equity, 200,000 equity, and it’s a probate. So now I know the cell factor has to be there. They’re going to lose the property. It’s not whether they’re going to, it’s just a matter of, and they have a lot of equity. So now can I contact the homeowners and/or whoever the next of kin are? And can we take the property before it goes to auction? And it’s not about doing a lot, it’s just being about more focused. But the question is, which place are you going to pick to focus on?

Issa Hanna (10:38)
I love that. Golden knowledge. Guys, if you didn’t catch that, go back in the video, go back on the podcast. If you didn’t hear or watch that and take notes. True, true golden knowledge. In a nutshell, you have to have your buyer’s net, right? You have to have something that works for you. It’s almost like fishing, right? You throw that net into the water, don’t go after just anything. Don’t get desperate because you haven’t bought a deal in X amount of time. Eventually, like Andrew said, one of those deals is going to meet your buyer’s net. It doesn’t matter where it comes from. If it meets your net, and you guys that watch the show all the time, you hear me say it all the time. If it makes dollars, it makes sense, right? So when it goes into that net, snatch it up right away. I love it. And then be perceptive to deals falling through the cracks, because Like you said, the market is a lot more sophisticated now. And if you do find yourself lost like that, if you’re in Chicago, reach out to Andrew. If you’re not, find yourself a good agent that can do these things for you, that can send you these lists. Andrew, golden knowledge. I’m getting super excited because that was such a precise breakdown on exactly how to invest into real estate. So for you guys.

Andrew Holmes (11:49)
As we’re talking about this, real estate is cyclical, meaning it runs in 90-day cycles, right? Whether it’s MLS, whether it is auctions, whether it is online auctions, if you really observe the way it works, for example, with the auctions, when it comes to end of February, March, April, May, June, you cannot buy something sensibly. Everybody and their brother is going to be the next real estate millionaire. So they’re going to pay stupid prices. And you’re like, how is this possible? Well, guess what? They’re going to buy one or two and they’re out. But then suddenly you get the back end of summer, which is July hits, and properties are going by the wayside, and you’re like, my God, why didn’t somebody buy it? Why? Because real estate is cyclical, especially when people are doing flips, they cycle through. So they will sell a lot of them will sell February, March, April. They closed May, June. So now in those months, people have a little bit of extra cash and they’re desperate and they’ll start paying. Any stupid money to be able to pick up a deal, right? Same thing happens on the MLS. Markets is very, very, very hot. And then you’ll see it’ll cool down a little bit. Then again it goes and that’s the part of it that if you truly it’s almost finding that pulse of the market. And whether it’s a hot market or cold market, if you realize what that pulse is and you have your finger on it really, really sharp, that’s where you make a lot of money. Right. And Knowing, especially today, because today we’re in a market which is there’s a dichotomy. We’ve never seen this before, where you have a market like Chicago where you have the least amount of inventory. But then you have a market like Florida, Texas, Tennessee, a lot of these markets, which were the hottest market known to mankind, there’s a lot of inventory. And people are like, Well, nothing in Florida is selling. Well, no, depends. What county, what zip code? There are a bunch of zip codes in Florida where the market times are 22 days, 25 days, 32 days. And then there are other zip codes that are 151 days. So if I’m a smart and astute investor, where am I going to go target? I’m not going to chase the deal. I’m going to chase the area first. Then in that area, I’m going to chase the deal because it becomes a layup if I know the market has very little inventory and I can even overprice the property by five to 10% and sell it, not because I’m that good, it’s because I understand the math and the numbers behind it. So if that makes any sense.

Issa Hanna (14:11)
Makes perfect sense. And that pulse on the market, real estate agents that watch this, as a buyer’s agent, just to relate this a little bit to you guys, we would go through cycles, right? November, December would hit and I would go from selling seven, eight homes a month in the summertime to, the weather gets a little bit cold and I was in Chicago to maybe one or two houses, it’s by cycles because why? A lot of different outside factors contribute to this market. In the cold-weather market, people aren’t working as much in the winter time on homes that need major, major rehab. When the weather starts to break, that’s when the floodgates open, people also want to move into a new school district before their kids start school. So there’s a lot of outside factors. And like you said, Andrew, if you can have your hand on the pulse of this market, man, you could clean up. So I wouldn’t expect anything less from the leader of Chicago REIA but man, the knowledge that you’re bringing to this show already, truly unbelievable. I want to pivot now into the real estate nightmare, right? We’re investors, we’ve all had at least one, if not multiple, by this time of our career. So give me a time that sticks out in your mind where something went bad You had to pivot and get through it and you came out the other side with a lesson learned.

Andrew Holmes (16:01)
I think everybody has a few of those, in different ways. And sometimes what seems like a nightmare, you seem to be a genius on the back end of it, right? But because time is what fixes it, right? I can think about a building. I still own the building, three-unit building early on, bought it, Auction.com-type of property. And whatever the numbers were, I think 130,000. It’s like a joke today. At the time, that was big money for me. Brookfield, phenomenal suburb. And the rehab is supposed to be 60, goes up to I think 120. I was even scared to look at the number, right? But at the moment in time, it seemed like a disaster, right? In that moment in time because the back-end value was maybe 250, 260, right? Today the back-end value is 600. But the property always cash flow. So even though, yes, for a flip, it was not a good property from a cash flow perspective, it always made money. Right. And so a lot of times I always had this philosophy that if you are a short-term pessimist, but a long-term optimist, you will be a good investor. What I mean by that is in the short term, if you’re not scared, you need to get your head examined. But in the long term, You have to be the guy that says, okay, it’s gonna be a brighter future. So in the short term, when you’re scared, when you’re paranoid, you’re gonna be very, very picky how you pick deals, how you make investments. And you’re gonna probably sometimes let go of some properties, which is okay, which is being scared is a good thing. But you have to invest for the future for the long run. This happened to us in Florida. I went to Florida, bunch of the people in the group, I’m like, hey guys, let’s build. Anybody who has more than 30, 40 houses in Chicago, let’s go to Florida. This is right after Corona. And we went, found Cape Coral up north of that, Port Charlotte, that area. And we built a lot of duplexes, two-unit buildings. And we’re like, we’re never selling them, we’re gonna keep them. Numbers were so good. Build cost 400,000, back-end values 550. Right. We did every street we drove, every single measure. We looked at the rents. What if the rents fall? What if the interest rates fall—go up? What if this happens? What if that happens? We ran every single thing, right? And yet, when I look at my returns in Chicago, they’re a hundredfolds compared to Florida. In Florida, we’re barely, barely breaking even because three things happened. One, not everybody that was moving there stopped because the market opened up again. Number two, interest rates jumped. Number three, at the same time, the demand, the amount, there were not just me. I was not the only genius looking at that. There were thousands of other people building. Now, the only thing that saved us was in relation to what I had already built here, the risk that I took there was relatively small. Right. So somebody may look at it, Andrew, it didn’t work out. Yeah, but sometimes nobody’s gonna hit 100 out of 100. And if somebody says they are, they’re lying to you. Right? It’s just there’s no such thing. But if you are 80% at bat, and even when things go wrong, As long as you don’t lose your shirt, right? If you don’t try anything, you’re never going to learn anything. And so it’s one of those things that a lot of times, and that’s where I feel sometimes when you look at investors that go belly up or go sideways, is they don’t understand the level of risk they should be taking relative to where they are, right? And that’s a key skill set. But if you’re not putting your butt on the line a little bit all the time, you’re not going to grow.

Issa Hanna (19:39)
Percent you gotta take a little bit of risk which it’s gotta be calculated right it’s all about the calculated risk you gotta know you gotta look at things profits worst case scenario you gotta estimate high and estimate your profits low if you can at the end of the day I don’t make that much money if it still makes sense to you jump in it but you always gotta be willing to say hey can I lose this and still carry on so Like I said, golden, golden, precise knowledge. You guys are at home. You guys are getting the how-to on real estate investing today. So make sure you guys are paying attention. Let’s talk about the future now. Five years from now, I look you up. I look up the Chicago REIA what am I gonna see you have built by then?

Andrew Holmes (20:19)
So the goal is, it’s a couple of different fold goal, and I think it’s based on where you are in your life, right? I just turned 51 and just had a baby. So I had a baby late in life, right? And so I think when you’re 30 years old, 60 is ancient, right? When you’re 51, 60 is young. You’re somebody once said that as the toilet paper starts running out, it seems to go quicker and quicker, right? And It’s true about life that your perspective on how and where you are and what you should be doing changes. And so how I was looking at things at say 30, 35 when I started actually investing in real estate versus today. So today I look at life from a simple philosophy. I have X amount of properties, I have X amount of cash flow that comes in a month, right? So about a hundred-some thousand net. Right. So now the question becomes is. If something were to happen to me tomorrow and I have my spouse left and I have a child left behind, right, without creating havoc in their lives, what is 100% for sure that would come in? Right. And so to me, over the next five years, it’s how do I just make it more and more stronger? So a lot of times people count the number of properties they own. I believe that’s the wrong thing. I believe what you have to count is what is the collectibility on your tenants. Meaning if you have 50 properties and they’re in crappy areas and your tenants are not that well collectible, your collections are not good. What is the predictability for cash flow? It’s very poor. In fact, you don’t have an asset, you have a liability because any debt, any taxes, anything is a liability on you and your family. And so today the way I look at it is that I want as many of those properties paid off or paid down as much as possible because that would be true security. And then on the second part of it, as it relates to Chicago REIA and that sort of thing, we want to take the message of 2-5-7. We have for the last 10 years, we have preached the gospel of 2-5-7 locally here. And we want to take that nationally Because I think it’s something that is very digestible. And for most real estate investors, if they follow that over a five- to seven-year period, they would truly end up with a lot of net worth and a lot of gold.

Issa Hanna (22:41)
One hundred percent. And I want to see 2-5-7 brought to the masses as somebody who’s been in the game for quite a long time. Investor, realtor, loan officer. First time I heard that philosophy, and it makes such great sense and can help you just tremendously build because you’re focusing on what? That long term, you’re not getting that short-term tunnel vision. You’re constantly focused on the long-term wealth building. Like I said, Andrew, truly, truly amazing knowledge. I’m gonna give you the floor now. If people wanted to get involved with Chicago REIA, if they wanted to get involved with you, where could they reach you at?

Andrew Holmes (23:14)
They can reach us at cashflowconference.com. It’s a three-day event that we do. And anybody who comes around us, I make no bones about it, we’re gonna try to feed you the Kool-Aid of cash flow. Right. It’s really that simple. That if you’re a wholesaler, you’re selling a lot of properties, people, great. Keep the best ones for you. If you’re a flipper, you’re selling, you’re killing it, it’s great. But then keep the best ones for you, right? And That’s really what we’re trying to get across. That every single thing that if you’re doing flips, it can make you a lot of money. If you’re doing wholesales, it can make you a lot of money. But the question becomes is if you have done something for the last five years of your life, 10 years of your life, or whatever it is, what do you have to show for it? And if you want to scale and grow that, right? That we all need, I needed flips. I didn’t have when I quit selling real estate, I quit a little bit too early. Was my mistake, right? But I needed flips. So I used to do what I would call is two flips, one rental. Right. That’s how I built that. So if that’s what people are looking for, that they truly want to build a portfolio and they truly want long-term wealth, then look us up. And a lot of the stuff we do is 100% free. And we’re more than happy to share all the information. So we don’t hold anything

Issa Hanna (24:31)
Love that. So make sure, guys, check him out. Short burst that he’s been on our show. He’s dropped a wealth of knowledge literally on this show, period. So if you guys get involved in him with Andrew and Chicago REIA, man, you guys can scale your business. You guys can create generational wealth legacy. Andrew, I want to close us out with one final question, one piece of advice I want you to give our young guys, our new investors, our new realtors. New professionals in the space. As Chicago REIA guy, you know how important growing your network and your business relationships are. So if you had to give these new guys one piece of advice on where to start, what would it be?

Andrew Holmes (25:10)
I would say keep seeking information. Today there’s no lack of information. In fact, the problem is there’s too much information, right? That’s the biggest problem today. But if you seek, you shall find. I truly believe that. And that there’s a basic philosophy that I’ve always had, which is if you take care of real estate for the first five years, real estate will take care of you for the rest of your life. Right. And I started looking at and became an agent at 19 because I wanted to quote-unquote be Mr. Rich. I wanted to invest. By 23, I was supposed to retire. Of course it didn’t happen. Then was 27, then was 30, then was 35. But it’s that the game of life is the chase, right? But if you chase it if you believe in a higher power, you believe in God, whatever your philosophy is, really life will present those things if you just keep at it. And frustration happens before growth with every single thing. So just keep seeking information, but just be careful who you listen to, right? Something like what you guys do with Investor Fuel. You guys are a great group, right? A mastermind group of a bunch of really, really, really successful in real estate investors. Right. And so even let’s just say that’s something that people can’t qualify for, but there are a lot of people who are in your group that would love to share their knowledge, would love people who have done well truly, right? Are always willing to share, always willing to give of themselves. And I would seek that out, whether it’s going to a real estate meeting, going to conferences, it’s the best investment you can ever make in yourself.

Issa Hanna (26:43)
Definitely. So in other words, guys, pick somebody that you can look up to that’s really rocking and rolling in the game. Ninety percent of the time, if you go up to somebody, hey, ask them some questions. They are flattered and they would love nothing more than to share their knowledge with you and help you grow and get to where you want to be. If they see you hungry. So, man, Andrew, unbelievable knowledge you brought onto the show today. I’d like to invite you back on if you’re not too busy for us in a few months, if you’ll have us. Sure.

Andrew Holmes (27:12)
No problem.

Issa Hanna (27:13)
Yep. Definitely gonna lock that one in with us because like I said, amazing, amazing knowledge you brought to the Real Estate Pros Show today. Thank you so much for coming on.

Andrew Holmes (27:22)
Definitely great. Glad to be here.

Issa Hanna (27:24)
I enjoyed the conversation and to my viewers at home. If you enjoyed my conversation with Andrew and want to see more like it, make sure to hit like and subscribe. I talk to people every day that can bring us different knowledge on every aspect of the real estate industry. Until next time. The Real Estate Pros are out.